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    Effect of Risk on Shape of Probability Distribution

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    The probability distribution of a less risky expected return is more peaked than that of a riskier return. What shape would the probability distribution have for (a) completely certain returns and (b) completely uncertain returns?

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    Solution Preview

    In case of less risky expected return, spread (variance) is low i.e. probability distribution is peaked. If the riskiness is further reduced, variance further decreases and it becomes ...

    Solution Summary

    Shape of probability distribution of returns is influenced by the riskiness of a security. Solution discusses the shape of probability distribution of returns in the two extreme given cases.