You believe that the possible returns on stock A will be either 25% or -15% over the coming year, depending on whether the economy does well or does poorly. Given some probabilities of the future state of the economy, you compute the standard deviation of the possible returns. To get the dispersion of the possible outcomes in the same units as the outcomes themselves (i.e., in %), you must then compute the variance.

Question

Quizplus · Accepted Answer

The standard deviation already provides the dispersion of possible outcomes in the same units as the outcomes themselves (e.g., %), while the variance is the standard deviation squared and thus not in the same units as the outcomes.

You Believe That the Possible Returns on Stock a Will