Standard deviation is commonly used to measure which type of risk in a data set? $\sigma$

• A. Systematic risk
• B. Liquidity risk
• C. Unsystematic risk
• D. Total risk ($\mathrm{overall\; variability}$)

Answer: (D)

Verified step by step guidance

1. Understand that standard deviation is a statistical measure that quantifies the amount of variation or dispersion in a set of data points.
2. Recognize that in finance and risk analysis, 'total risk' refers to the overall variability of returns, which includes both systematic and unsystematic risks combined.
3. Recall that systematic risk is the risk inherent to the entire market or market segment, while unsystematic risk is specific to a particular company or industry.
4. Note that liquidity risk relates to the ease with which an asset can be bought or sold without affecting its price, which is not measured by standard deviation.
5. Conclude that since standard deviation measures the overall variability of data, it is used to measure total risk, encompassing both systematic and unsystematic components.