Measuring Risk by Dick Stoken
ARTICLE SYNOPSIS ...There are two common ways to measure performance: the standard deviation of returns and the Sharpe ratio. Here's a third way.
How do we measure risk? In the
financial industry, the generally
accepted method is the standard
deviation of returns. A low standard
deviation indicates that
expected returns vary little from
average returns (suggesting less
risk), while a high standard deviation
suggests that expected
returns vary greatly from average returns (implying more
risk). The assumption is that stable past returns are less risky,
yet many practitioners are uneasy with this concept.