Introducing the statistics of risk

01:09 Mins Read

This video takes a closer look at the statistical measures used to evaluate risk.


Before you invest in an asset, you will no doubt want to know how much risk it carries, isn’t it? To understand that, it’s important to measure the risk involved. For a single asset, the risk is indicated by its standard deviation. The standard deviation is simply the square root of the variance. It denotes how much the actual returns of the stock will vary from its expected returns. For a portfolio, calculating the risk gets a little bit tricky. Essentially, we need to find the variance of the portfolio. And to find that out, there are two other statistical tools that you need to be aware of, namely covariance and correlation. Covariance is a measure of how two variables are related to one another. Correlation shows the strength of the relationship between the variables. Want to learn more about how these statistics help measure risk? Check it out in the next chapter of this module.

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