Asked by arjun trivedi on May 03, 2024
Verified
Explain some of the key differences between standard deviation and beta.
Standard Deviation
A statistic that measures the dispersion or variability of a dataset relative to its mean, used in finance to quantify the volatility of an investment.
Beta
A measure of a stock's volatility in relation to the overall market; it indicates the risk associated with a particular equity.
- Comprehend the definitions and differences between systematic and unsystematic risk.
- Describe and evaluate the importance of the beta coefficient in gauging systematic risk.
Verified Answer
MB
Melissa BrownMay 10, 2024
Final Answer :
Standard deviation measures total risk, which includes both systematic and unsystematic risk. Beta measures systematic risk, which is the only risk which is rewarded by the market. A portfolio beta is the weighted average of the security betas held in the portfolio. The portfolio beta must lie between the highest and the lowest individual security beta. A portfolio standard deviation can be lower than that of any individual security within the portfolio due to the benefits of diversification.
Learning Objectives
- Comprehend the definitions and differences between systematic and unsystematic risk.
- Describe and evaluate the importance of the beta coefficient in gauging systematic risk.