Wize University Introduction to Finance Textbook > Risk, Return & Portfolio Theory
Ex-Post Standard Deviation
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Measuring Risk
Risk implies that an outcome is not certain, the way we quantify risk in this context is by measuring the standard deviation. To compute the standard deviation of returns that have already occurred (historical) use the following formula:
Formula breakdown:
Alternatively, you can use your Texas Instrument financial calculator to solve it.
How to Compute Standard Deviation on Financial Calculator
Formula breakdown:
R1, R2, R3 = Individual returns (as many as necessary)
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Example: Standard Deviation
You have observed the following annual returns for Motherboard Inc.: 25%, 15%, -20%, 30%, and -15%.
What is the standard deviation of returns?
Mark Yourself Question
- Grab a piece of paper and try this problem yourself.
- When you're done, check the "I have answered this question" box below.
- View the solution and report whether you got it right or wrong.
Practice: Standard Deviation
A stock has year-end prices and dividends as below.
a) What is the Arithmetic Average return?
b) What is the Geometric Average return?
c) What is the standard deviation of returns?