Asked by Kaylie Katsiris on Jun 28, 2024
Verified
You believe that the possible returns on stock A will be either 25% or -15% over the coming year, depending on whether the economy does well or does poorly. Given some probabilities of the future state of the economy, you compute the standard deviation of the possible returns. To get the dispersion of the possible outcomes in the same units as the outcomes themselves (i.e., in %), you must then compute the variance.
Standard Deviation
A statistical measure of the dispersion of a set of data from its mean, often used to quantify the risk of a financial instrument.
Variance
A measure of how much a set of numbers differ from their average value.
Dispersion
A statistical measure that describes the spread of values around the mean or average, indicating variability within a data set.
- Understand the role of variance and standard deviation in measuring the dispersion of returns for investments.
Verified Answer
SP
Sydney PorterJun 30, 2024
Final Answer :
False
Explanation :
The standard deviation already provides the dispersion of possible outcomes in the same units as the outcomes themselves (e.g., %), while the variance is the standard deviation squared and thus not in the same units as the outcomes.
Learning Objectives
- Understand the role of variance and standard deviation in measuring the dispersion of returns for investments.