What does standard deviation measure in the context of investment returns?

What does standard deviation measure in the context of investment returns?

• A. Average return
• B. Return volatility
• C. Covariance
• D. Beta

Answer: (B)

Standard deviation measures how spread out investment returns are around the average, which is another way to describe return volatility. When returns swing a lot from month to month or year to year, the standard deviation is high, signaling greater uncertainty and risk about what to expect in the future. It’s not the average return itself (that’s the mean), and it doesn’t describe how assets move together (covariance) or how much a security moves with the market (beta).

Standard deviation measures how spread out investment returns are around the average, which is another way to describe return volatility. When returns swing a lot from month to month or year to year, the standard deviation is high, signaling greater uncertainty and risk about what to expect in the future. It’s not the average return itself (that’s the mean), and it doesn’t describe how assets move together (covariance) or how much a security moves with the market (beta).