Explain how the statistical concepts of mean and standard deviation ap

Explain how the statistical concepts of mean and standard deviation apply to the financial ideas of risk and return.

What will be an ideal response?

ANSWER

Answer: One common definition of risk is that it is the probability of getting a return different from what you expect. Calculating an average rate of return gives you a reasonable expectation. Then calculating the standard deviation lets you apply the normal curve probabilities around that expectation. So, for example, if you calculate a 10% expected rate of return and a 5% standard deviation, then you can estimate a 34% probability of making a return of between 10% and 15%, or a 16% probability of making more than 15%, or an 84% chance of making less than 15%.