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Standard Deviation as a Risk Indicator for Investment Purposes - Essay Example
Author : hagenesmeggie
Finance & Accounting
Pages 4 (1004 words)
Running Head: Standard Deviation as Risk Indicator Standard Deviation as Risk Indicator Standard Deviation as Risk Indicator Introduction Risk management is an important part of our everyday lives. Having the perfect balance between risk and returns is not only an inherent part of our management of lives but also the management of financial and investment portfolios as well…
41, 2003). However, over the years, many experts and researchers have also tried to point fingers at this approach trying to highlight its serious shortcomings. This paper is an attempt to capture a glance of that debate and critically analyze the use of standard deviation as a risk indicator for investment purposes. Discussion Standard deviation, in finance, is one of the widely used indicators of risk associated with any given security such as bonds, stocks, properties, commodities and others. Standard deviation allows the investors to predict and anticipate the behaviour of the security in the near future (Bhansali, pp. 34-35, 2010). Simply, standard deviation, which is square of the variance, tells the investors that how much they can expect the price of the security to deviate from its mean returns (Brase & Brase, pp. 10-12, 2011). Therefore, securities with high standard are more likely to show violate behaviour but the ones with low standard deviation are more likely to show consistent behaviour. Quite understandably, the former type of securities will have a great risk and later would be less risky (Wander & D'Vari, pp. 36, 2003). ...