How Does Volatility, Standard Deviation and Beta Impact An Investment Portfolio?Risk in an investment is often thought of as volatility. This would be considered as the risk of losing value in an investment. It should be more correctly viewed as the probability that prices will fluctuate. Volatility of returns is most commonly measured as standard deviation. Standard deviation measures how widely the actual returns on an investment varies when compared to the average or mean return. As standard deviation rises, the more risky an investment is seen to be.
Investment theory presumes that returns are normally distributed. This means that they are spread symmetrically around the average return. When data is normally distributed, returns can be expected to fall within one standard deviation of the average return two-thirds of the time. During the remaining one third of the time, returns would be expected to fall outside of these boundaries. To explain this a little more clearly: if an investment has an average return of 8% and a standard deviation of 5%, then two thirds of the time returns can be anticipated to fall in a range of between 3% and 13%.
Relative to the market as a whole, the volatility of a security is known as beta. The market has a beta of 1. Other related pages:
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