Standard Deviation - Measure Risk

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Standard Deviation
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Standard Deviation

We can measure risk by using standard deviation. Higher standard deviation means higher risk.

Here is the example from the probability distribution page

Probability Distribution - In Business

Economic Outcome	Probability	Return on Investment
Great	20%	25%
Good	40%	15%
So-So	30%	5%
Really Bad	10%	0%

(Sorry, I don't know how to write sigma and the square root sign in html, so I can't show you the formula for Standard Deviation, but you can still plug in your numbers to the chart below)

Economic Outcome	Return on Investment	minus	ERR - the Expected Rate of Return	equals	answer	squared	times	Probability of the Economic Outcome	equals	Answer
Great	25%	-	12.5%	=	12.5	156.25	X	20%	=	31.25
Good	15%	-	12.5%	=	2.5	6.25	X	40%	=	2.5
So-So	5%	-	12.5%	=	7.5	56.25	X	30%	=	16.875
Really Bad	0%	-	12.5%	=	12.5	156.25	X	10%	=	15.625
								Total	=	66.25

So the total is 66.25. This is called the Variance.
The square root of 66.25 = 8.139
So the Standard Deviation is 8.139