The risk of an investment as measured by the standard deviation reflects
A)only how much lower than the expected value the actual outcome might be.
B)both how much lower or how much higher than the expected value the actual outcome might be.
C)how fair the bet is.
D)how random the variable being evaluated is.

Question

Quizplus · Accepted Answer

Standard deviation measures the variability or spread of possible outcomes around the expected value. It takes into account both the outcomes that are lower than the expected value as well as the outcomes that are higher than the expected value. Therefore, option B is the correct answer. Option A only talks about the lower outcomes and is not comprehensive. Option C refers to fairness, which is not directly related to risk. Option D talks about randomness, which is not directly related to risk but to the nature of the variable being evaluated. The standard deviation measures both the positive and negative deviation from the expected value, indicating the range of possible outcomes. Option A (lower than the expected value) is only half of the story, option C (how fair the bet is) is not related to the measurement of risk, and option D (how random the variable is) is not the most accurate description of what the standard deviation represents.

The Risk of an Investment as Measured by the Standard