Name: Dhananjay Mudras
Roll No: 10
Standard deviation is one way to measure risk
Standard deviation can be a very simple way to calculate risks in day to day scenerios.Standard deviation is important in finding how much variance there is from the mean. In real life standard deviation is essentially used to calculate the probablity of an unusual happenning. In a way, standard deviation can calculate the odds of any disaster and hence prepared steps can be taken in advance and hence helps us in taking calculated risks in our daily and professional life.
Following are some examples where standard deviation can be used for calculating risks.
An insurance company has a pretty good idea how much risk it is exposed to, for instance, when agreeing to pay out $500,000 to a beneficiary of someone whose life is insured. Its premiums are set accordingly.
Risk management becomes a different ball game when it comes to stocks. People can lose all or most of their investments if they make a bad decision in investing their money in the wrong stocks. A stock that tends to go up and down frequently, in large moves, would have a high standard deviation. A volatile stock is riskier because there's a greater chance of the investor facing a large loss at any given time — especially a time when the investor might need to sell the stock.
Roll No: 10
Standard deviation is one way to measure risk
Standard deviation can be a very simple way to calculate risks in day to day scenerios.Standard deviation is important in finding how much variance there is from the mean. In real life standard deviation is essentially used to calculate the probablity of an unusual happenning. In a way, standard deviation can calculate the odds of any disaster and hence prepared steps can be taken in advance and hence helps us in taking calculated risks in our daily and professional life.
Following are some examples where standard deviation can be used for calculating risks.
An insurance company has a pretty good idea how much risk it is exposed to, for instance, when agreeing to pay out $500,000 to a beneficiary of someone whose life is insured. Its premiums are set accordingly.
Risk management becomes a different ball game when it comes to stocks. People can lose all or most of their investments if they make a bad decision in investing their money in the wrong stocks. A stock that tends to go up and down frequently, in large moves, would have a high standard deviation. A volatile stock is riskier because there's a greater chance of the investor facing a large loss at any given time — especially a time when the investor might need to sell the stock.
By contrast, a slow-and-steady stock would be less scary, and less risky.
There's no question there are some problems using standard deviation to measure risk. But until someone invents a better way, standard deviation has been shown to do a good job in real life applications.
Source: http://usatoday30.usatoday.com/money/perfi/columnist/krantz/2008-03-10-standard-deviation_N.htm
