Standard deviation is:

Standard deviation is:

• A. An indication of the security or portfolio volatility.
• B. The average of the deviations, or spread, of sample observations about their mean
• C. The most widely used estimate of risk
• D. All of the above

Answer: (D)

Standard deviation captures how spread out returns are around the average, which is why it’s a direct measure of volatility and risk. The bigger that spread, the more the security or portfolio price can swing, so standard deviation serves as a clear indication of volatility. It’s also the most common way people quantify risk in finance because it combines information about all outcomes into a single, comparable number. The statement about the average of deviations conveys the same idea of dispersion around the mean, even though the precise calculation uses squared deviations (and then takes a square root). In practice, this notion of spread around the mean is exactly what standard deviation measures, which is why all of the above descriptions align, making all of the above the best choice.

Standard deviation captures how spread out returns are around the average, which is why it’s a direct measure of volatility and risk. The bigger that spread, the more the security or portfolio price can swing, so standard deviation serves as a clear indication of volatility. It’s also the most common way people quantify risk in finance because it combines information about all outcomes into a single, comparable number. The statement about the average of deviations conveys the same idea of dispersion around the mean, even though the precise calculation uses squared deviations (and then takes a square root). In practice, this notion of spread around the mean is exactly what standard deviation measures, which is why all of the above descriptions align, making all of the above the best choice.