Question 5.RQ.4: Explain why the standard deviation may be useful in measurin...

Financial Management for Decision Makers

Explain why the standard deviation may be useful in measuring risk.

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Risk arises when there is more than one possible outcome for a project. The standard devi-ation measures the variability of returns and can provide a useful measure of risk. Generally speaking, the higher the standard deviation, the higher the level of risk associated with a project. However, when the distribution of possible outcomes is skewed, the standard deviation may not provide a reliable measure of risk as it fails to distinguish between ‘down-side’ and ‘upside’ risk.

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