Business Degree Certification Practice Test

What risk does standard deviation measure?

1. Total

2. Nondiversifiable

3. Unsystematic

4. Systematic

The correct answer is: Total

Standard deviation measures the total risk associated with an investment, which encompasses both systematic and unsystematic risks. It quantifies the amount of variation or dispersion in a set of data points, allowing investors to understand the degree to which returns on an investment may deviate from the expected return. Total risk, as captured by standard deviation, includes all types of risks affecting an investment. Systematic risk refers specifically to market risk that impacts all securities, such as economic changes or natural disasters, while unsystematic risk pertains to specific risks related to individual companies or industries, which can be mitigated through diversification. In this context, standard deviation serves as a useful metric for investors to gauge overall volatility and make informed decisions based on how much risk they are willing to accept. Understanding how total risk is framed within these categories helps investors formulate strategies to manage and mitigate potential negative impacts on their portfolios. Thus, the correct understanding revolves around total risk, or the overall uncertainty and potential for loss in returns, measured by standard deviation.