Multiple choice

Which of the following is a disadvantage of Standard Deviation as a measure of risk?

  1. Standard Deviation measures total risk, not just market risk

  2. It is based on past returns, which does not necessarily indicate further performance

  3. It is an independent number

  4. All types of funds can be measured with standard deviation
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Standard Deviation's key limitation is that it's backward-looking: it measures historical volatility, which may not continue. Markets evolve, and past volatility doesn't predict future risk. This makes SD a useful but imperfect risk measure.

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