The standard deviation of a stock’s return is a measure of its:Group of answer choicesexpected future returncorrelationsystematic risktotal risk
Question
The standard deviation of a stock’s return is a measure of its:
- expected future return
- correlation
- systematic risk
- total risk
Solution
The standard deviation of a stock’s return is a measure of its total risk.
Here's why:
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Standard deviation is a statistical measure that reflects the amount of variability or dispersion around an average.
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In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility, or risk.
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Therefore, the standard deviation of a stock's return measures how much the return on the stock is deviating from the expected normal or average returns.
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High standard deviation means the returns are spread out over a large range of values. This means the price of the stock can change dramatically in a very short time, making it possible for investors to experience significant gains or losses.
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Hence, it is a measure of total risk because it takes into account both systematic risk (market risk) and unsystematic risk (specific to individual stocks).
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It does not measure expected future return or correlation. Expected future return is a prediction based on historical data or analysis, and correlation refers to how changes in one variable are associated with changes in another.
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