What is standard deviation in investing?

Standard deviation measures how much investment returns deviate from their average. It is widely used as a proxy for portfolio volatility or total risk.

How do you calculate annualised volatility?

To annualise volatility, calculate the standard deviation of periodic returns and multiply by the square root of the number of periods per year (e.g., √252 for daily returns).

Why is standard deviation important in portfolio analysis?

It provides a quantitative measure of risk. Higher volatility means greater uncertainty of returns, which can impact portfolio suitability and investor decisions.

Can standard deviation be used across asset classes?

Yes. Volatility can be calculated for stocks, bonds, funds, or entire portfolios, enabling comparisons of relative risk across different asset classes.

What are the limitations of standard deviation?

It assumes returns are normally distributed and may not fully capture tail risks or asymmetric return patterns. Alternative risk metrics like downside deviation can complement it.

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