What is the standard deviation of Investment #1 indicative of?

What is the standard deviation of Investment #1 indicative of?

• A. Its expected return
• B. Its volatility
• C. Its risk-free rate
• D. Its beta

Answer: (B)

The standard deviation of Investment #1 is indicative of its volatility. Standard deviation measures the dispersion of returns around the mean return of an investment. A higher standard deviation indicates that the investment's returns are more spread out, leading to greater volatility, while a lower standard deviation suggests that returns are more closely clustered around the mean, reflecting lower volatility. Volatility is a key concept in portfolio management because it provides insight into the potential price fluctuations and the level of uncertainty associated with the investment. Investors often use this measure to gauge how much the returns of an investment may vary, which is crucial for making informed investment decisions and managing risk effectively. In contrast, characteristics like expected return relate to the average outcome an investor anticipates, the risk-free rate pertains to the return of an investment with zero risk, and beta measures how an investment's returns move in relation to the market as a whole. Therefore, while those elements are essential in portfolio analysis, they do not directly derive from the standard deviation.

The standard deviation of Investment #1 is indicative of its volatility. Standard deviation measures the dispersion of returns around the mean return of an investment. A higher standard deviation indicates that the investment's returns are more spread out, leading to greater volatility, while a lower standard deviation suggests that returns are more closely clustered around the mean, reflecting lower volatility.

Volatility is a key concept in portfolio management because it provides insight into the potential price fluctuations and the level of uncertainty associated with the investment. Investors often use this measure to gauge how much the returns of an investment may vary, which is crucial for making informed investment decisions and managing risk effectively.

In contrast, characteristics like expected return relate to the average outcome an investor anticipates, the risk-free rate pertains to the return of an investment with zero risk, and beta measures how an investment's returns move in relation to the market as a whole. Therefore, while those elements are essential in portfolio analysis, they do not directly derive from the standard deviation.