Deviation adds up to a risky standard

WE spend a lot of our time explaining what the term risk means.

Generally advisers use the term standard deviation as the traditional measure of risk.

But is this a true definition of what members of the public understand to be the risk of an investment decision?

Let’s look at a hypothetical example:

Investment A B

1999 % %

January 2 -2

February 4 -4

March 1.8 -1.8

April 3 -2.1

May 1 -2

June 4 -2

July 6 -2.1

August 2 -2.3

September 5 -1.8

October 3 -1.8

November 2 -2

December 7 -2

On the basis of the standard deviation, Investment A has a higher risk attached to it.

Yet wouldn’t most people consider that Investment B has a higher risk given that it has produced a negative return in every month of the period?

Most investors would view Investment B as the riskier investment, given the capital losses this investment has produced. So is the standard deviation measure the appropriate one for explaining risk?

Perhaps we should be examining the lexicons and research to find something else that defines risk in a fashion more akin to what people understand to be risk.

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