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Article: Standard deviation: a risky measurement tool: standard deviation measures the volatility of a mutual fund, but is imperfect as a risk measurement tool.
- Article from:
- Money Digest
- Article date:
- June 1, 1998
- Author:
CopyrightCOPYRIGHT 1998 Money Digest. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Standard deviation is used to measure the volatility of a mutual fund. Volatility is a key indicator of the risk associated with a mutual fund compared to the average mutual fund of its class. Generally, the higher the standard deviation, the higher the variability or risk and the higher the anticipated return.
For example, AIC Advantage is one of the top performers for large cap Canadian equity funds. It has a three-year standard deviation of 5.0. The average Canadian large cap fund has a three-year standard deviation of 3.42. This tells an investor that AIC has above average volatility, which should translate into higher returns.
Acceptable but ...