Fund A has a 5-year average return of 10% and a standard deviation of 5%. Fund B has a 5-year average return of 8% and a standard deviation of 2%. Select the most accurate statement about Funds A and B.
A.
Fund A will always provide a higher return than Fund B
B.
Fund B’s lowest return is lower than Fund A’s lowest return
Comprehensive and Detailed Explanation From Exact Extract:
A lower standard deviation indicates lower volatility and thus lower risk. Fund B, with a standard deviation of 2%, is less risky than Fund A, with a standard deviation of 5%. The feedback from the document states:
"We can find the probable range of returns as follows: Average Return + Standard deviation = Positive outcome. Average Return - Standard deviation = Negative outcome. In any given year Fund A, which has the higher standard deviation, could fluctuate much more widely, making it less attractive as an investment, even over the long-term. Volatility is the most common measure of risk."
Chosen Answer:
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