Knowledge Tree
Relations (1)
related 3.00 — strongly supporting 7 facts
Standard deviation is frequently used as a quantitative metric to measure investment risk, as described in [1], [2], and [3]. However, [4], [5], and [6] highlight that while it is a common proxy for risk, it is often criticized for failing to capture the true nature of financial loss.
Facts (7)
Sources
Chapter 8 – Risk and Return – Fundamentals of Finance pressbooks.pub 4 facts
claimIn portfolio management, calculating the expected return and standard deviation of a portfolio comprising two stocks with a positive but low correlation results in a lower overall portfolio risk compared to holding either stock individually.
claimStandard deviation measures the variability or volatility of investment returns relative to the expected return, which quantifies the investment's risk.
claimRisk-averse investors evaluate investment options by comparing expected returns against standard deviation (risk), typically preferring lower risk for a given level of return.
claimFor individual assets, both standard deviation and beta are relevant metrics for assessing risk, depending on whether the asset is viewed in isolation or as part of a portfolio.
Next Generation Investment Risk Management: Putting the 'Modern ... financialplanningassociation.org 3 facts
claimStandard deviation measures the dispersion of returns around an average, but it fails to capture an investor's actual risk of losing money or failing to meet specific financial objectives.
perspectiveThe authors of 'Next Generation Investment Risk Management' argue that risk should be measured in the same way investors intuitively think about it—as the chance of significant loss or the failure to meet a financial objective—rather than simply as standard deviation, which is the amount of dispersion around the average return.
claimStandard deviation as a risk measure is flawed because it does not distinguish between deviations above the mean (positive returns) and deviations below the mean (negative returns).