Which statement about standard deviation is true?

Which statement about standard deviation is true?

• A. It measures market direction
• B. It indicates liquidity risk
• C. It is a measure of portfolio volatility and risk
• D. It has no relation to risk

Answer: (C)

Standard deviation measures how much returns deviate from their average, capturing the dispersion of returns over a period. This dispersion is what we call volatility, and in investing, volatility is a direct reflection of risk—the more the returns swing, the higher the uncertainty and potential for loss as well as gain. So the statement that standard deviation is a measure of portfolio volatility and risk is the best one. It doesn’t indicate market direction—that would be more about trends or beta—and it doesn’t directly quantify liquidity risk, which concerns how quickly you can convert assets to cash without a big price impact. Standard deviation is a fundamental way to express how much risk comes from variability in returns.

Standard deviation measures how much returns deviate from their average, capturing the dispersion of returns over a period. This dispersion is what we call volatility, and in investing, volatility is a direct reflection of risk—the more the returns swing, the higher the uncertainty and potential for loss as well as gain. So the statement that standard deviation is a measure of portfolio volatility and risk is the best one. It doesn’t indicate market direction—that would be more about trends or beta—and it doesn’t directly quantify liquidity risk, which concerns how quickly you can convert assets to cash without a big price impact. Standard deviation is a fundamental way to express how much risk comes from variability in returns.