How is a portfolio's risk typically measured?

How is a portfolio's risk typically measured?

• A. By the total balance of assets
• B. By the average returns of the assets
• C. By the standard deviation of its returns
• D. By the number of different asset classes

Answer: (C)

A portfolio's risk is typically measured by the standard deviation of its returns. Standard deviation quantifies the amount of variation or dispersion in a set of values, in this case, the returns of the portfolio. A higher standard deviation indicates that the portfolio's returns are more spread out and can fluctuate significantly from the average, suggesting greater volatility and risk. Conversely, a lower standard deviation indicates more stable and consistent returns, reflecting lower risk. Using standard deviation as a risk measurement is essential in investment management, as it allows investors to better understand potential fluctuations in portfolio performance and helps in comparing the risk levels of different investment options. This precise measure provides a statistical basis for assessing investment performance and aligning it with the investor's risk tolerance and investment objectives.

A portfolio's risk is typically measured by the standard deviation of its returns. Standard deviation quantifies the amount of variation or dispersion in a set of values, in this case, the returns of the portfolio. A higher standard deviation indicates that the portfolio's returns are more spread out and can fluctuate significantly from the average, suggesting greater volatility and risk. Conversely, a lower standard deviation indicates more stable and consistent returns, reflecting lower risk.

Using standard deviation as a risk measurement is essential in investment management, as it allows investors to better understand potential fluctuations in portfolio performance and helps in comparing the risk levels of different investment options. This precise measure provides a statistical basis for assessing investment performance and aligning it with the investor's risk tolerance and investment objectives.