CompTIA Data+ (DA0-002)Data AnalysisMedium
A financial analyst is comparing the volatility of two different stock portfolios. Portfolio A has a standard deviation of returns of 12%, while Portfolio B has a standard deviation of returns of 8%. Both portfolios have the same average return. What can the analyst infer from these standard deviations?
- APortfolio A's returns are more dispersed from its mean than Portfolio B's.
- BBoth portfolios have similar risk profiles.
- CPortfolio B is riskier than Portfolio A.
- DPortfolio A has a higher average return than Portfolio B.
Show answer & explanationAnswer & explanation
Correct answer: A. Portfolio A's returns are more dispersed from its mean than Portfolio B's.
Standard deviation measures the dispersion or spread of data points around the mean. A higher standard deviation indicates greater variability, meaning the returns for Portfolio A are more spread out (more volatile) compared to Portfolio B.
Why the other options are wrong
- B. Different standard deviations indicate different risk profiles; 12% is significantly different from 8%.
- C. Standard deviation is a measure of risk/volatility. A lower standard deviation (8% for B) indicates lower risk, so B is less risky than A.
- D. The question states both portfolios have the same average return, so this is incorrect.
Standard Deviation
A measure of the amount of variation or dispersion of a set of values.
- Indicates how spread out numbers are from the average (mean).
- A low standard deviation means values are close to the mean.
- A high standard deviation means values are spread out over a wider range.
Memory trick: STD DEV: How SPREAD OUT your data is.