Textbook Question
Refer to the sample statistics from Exercise 5 and determine whether any of the house prices below are unusual. Explain your reasoning.
a. \$225,000
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3. Describing Data Numerically
Interpreting Standard Deviation
Multiple Choice
In statistics, the standard deviation of a set of returns measures which type of risk?
A
Credit/default risk (likelihood of nonpayment)
B
Unsystematic (firm-specific) risk only
C
Total risk (overall variability/volatility of returns around the mean)
D
Systematic (market) risk only
Verified step by step guidance1
Understand that standard deviation in statistics measures the amount of variability or dispersion in a set of data points, in this case, returns.
Recognize that in finance, the standard deviation of returns quantifies how much the returns deviate from their average (mean) value, capturing the overall fluctuations.
Recall that total risk refers to the overall variability or volatility of returns, which includes both systematic (market) risk and unsystematic (firm-specific) risk.
Note that credit/default risk is a specific type of risk related to the likelihood of nonpayment and is not directly measured by standard deviation of returns.
Conclude that the standard deviation of returns measures total risk, representing the overall variability or volatility of returns around the mean.
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