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Product Risk And Uses Of Standard Deviation Finance Essay

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Product Risk And Uses Of Standard Deviation Finance Essay

Risks and returns are the two most important concepts in the investing world. The concept of return, which is the profit on investment, is a very clear subject to many investors but the risk is often vague. Several approaches had been employed over times to measure the risks associated with investment portfolios. Standard deviation is a popular basis for risk measurement used for investment purposes (Today Forward, 2010). Standard deviation hence helps to tell a story behind a data and the concept the normal distribution of data (Niles, 2010). This though has been a scary and sometimes complicated topic to people, students and practitioners as well (Niles, 2010; Williamson, 2010). Standard deviation was first discovered and used by a renaissance scientist in Victoria London, Karl Pearson in 1897 in his quest to help his friend Weldon to use the measure of variation to understand the evolution process and to use empirical evidence of natural selection to find out how new species emerged (Magnello, 2005).

USES OF STANDARD DEVIATION

Standard deviation is defined as a measure of dispersion of a set of data from its mean (Investopedia, 2010). It is calculated as the square root of variance. The more spread apart the data, the higher the deviation. It is also seen as a measure of variability among the values of a frequency distribution (Taylor & Francis, 2009). Standard deviation, also known as historical volatility is also seen as the “mean of the mean” (Niles, 2010). However, in finance, standard deviation is...