Risk Measures

Quantitative measures of risk. They attempt to assess the degree of variation or uncertainty about earnings or return. There are several measures, including the standard deviation, coefficient of variation, and beta. The standard deviation is a statistical measure of dispersion of the probability distribution of possible returns. The smaller the deviation, the tighter the distribution and, thus, the lower the riskiness of the investment. One must be careful in using the standard deviation to compare risk since it is only an absolute measure of dispersion (risk) and does not consider the dispersion of outcomes in relationship to an expected return. In comparisons of securities with differing expected returns, we commonly use the coefficient of variation. The coefficient of variation (CV) is computed simply by dividing the standard deviation for a security by its expected value. The higher the coefficient, the more risky the security. Beta measures a stock's or mutual fund's volatility relative to the general market.