The standard deviation of investment returns is a measure of which?

• A. Investment risk.
• B. Correlation of returns.
• C. Diversification.
• D. Investor confidence.

Answer: (A)

Risk is the potential variability in what you can earn from an investment. The standard deviation measures how much returns tend to diverge from their average over time. When the standard deviation is large, outcomes are more spread out, meaning more uncertainty and a higher level of risk. It captures overall volatility of that investment’s returns, not how assets relate to each other or how confident an investor feels. Correlation describes how different assets move together, diversification is about combining assets to reduce risk, and investor confidence is a subjective perception, not a statistical measure of return variability.