What is the standard deviation of a tighter probability distribution____________?
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Answer: D. Smaller
Explanation
A tighter probability distribution reflects a smaller standard deviation and lower uncertainty. When potential outcomes cluster closely around the expected value, the associated investment risk is reduced. Analysts interpret a smaller standard deviation as a sign of predictable and stable future returns. Standard deviation measures the dispersion of a dataset around its statistical mean or expected value. Probability distributions map out all possible return outcomes alongside their respective likelihoods. In finance, narrower bell curves signify lower volatility and more dependable forecasting models.
Risk-averse investors prefer assets with tighter probability distributions to protect their capital portfolios. For example, government treasury bills have much tighter return distributions than volatile cryptocurrency assets. It provides quantitative support for comparing the risk profiles of competing investment opportunities. Long-termed refers to time horizons rather than the statistical dispersion of a probability distribution. Short-termed describes duration rather than the mathematical spread of potential investment outcomes. Riskier describes wider distributions with larger standard deviations and greater return uncertainty.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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