standard deviation

Question

A report claims that the returns for the investment portfolios with a single stock have a standard deviation of 0.4848?, while the returns for portfolios with 3131 stocks have a standard deviation of 0.329329. Explain how the standard deviation measures the risk in these two types of portfolio

Answer 1

Hi,

 

In general, the standard deviation measures the amount of "spread" in the sample values about the sample's average (mean). The larger the standard deviation, the greater the "spread" of values around the mean.

 

In financial circles, this concept of spread is called "volatility" and measures how much the sample of investment returns fluctuates around the average investment return.

 

In finance, volatility is also referred to as "risk"; the greater the return fluctuation, the greater the risk.

 

So, the first sample with a SD = .48 has a higher degree of risk (i.e., a greater chance for return volatility) than the other sample with a SD = .33.