CFA Investment Exam 2025 – 400 Free Practice Questions to Pass the Exam

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion in a set of values. In the context of risk measurement, it assesses how much individual returns deviate from the mean return of a portfolio or an asset. A higher standard deviation indicates greater volatility and, consequently, higher risk, as it shows that returns are spread out over a wider range.

This focus on return dispersion makes standard deviation a fundamental tool in risk analysis, particularly in finance, where understanding the variability of asset returns is crucial for portfolio management and asset allocation decisions. As investment professionals evaluate the risk associated with different assets or portfolios, standard deviation serves as a key indicator of potential fluctuations in returns, helping investors make more informed decisions.

In contrast, the other methods listed do not primarily focus on measuring the dispersion of returns. Probability analysis involves assessing the likelihood of various outcomes but does not specifically quantify their variability. Qualitative assessment evaluates non-numeric factors influencing investment decisions, while performance attribution identifies the sources of an investment's returns, rather than measuring return dispersion. Thus, standard deviation stands out as the method that effectively captures the essence of return variability in risk measurement.