Question

Which two of the following five statements are correct?

Select two alternatives:

• While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves.
• The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors.
• We can use a security's historical average return to estimate its actual expected return.
• The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns.
• When firms carry both systematic and firm-specific risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

Answer 1

Answer-

The third statement and fifth statement are correct.

The third option is Correct.
From past history we can estimate its actual expected return.

The fifth statement is correct.
When firms carry both systematic and firm-specific risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

The first statement is incorrect.
While the variance and the standard deviation both measure the variability of the​ returns, the variance is easier to interpret because it is in the same units as the returns themselves.

The second statement is incorrect.
95% Confidence interval will be average return plus or minus 1.96 times standad errors.

The fourth statement is False.
The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.