Why is it important to calculate standard deviation for an investment? An investment portfolio is a...

Why is it important to calculate standard deviation for an investment?

An investment portfolio is a group of investments. Why is it important to create an investment portfolio? (Hint: standard deviation) What is the optimal number of stocks in an investment portfolio? Is there any benefit to owning 100 individual stock positions?

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Expert Solution

Before investing you fund into any investment proposal, one should analyze two aspects related to investment (1) return (2) risk. Risk is called the measurement of uncertainity associated with the expected results of the investment. standard deviation is called a meaure of risk associated with the investment. so calculation of standard deviation is important in investment decision. with the help of stadard deviation we can forecast the chance of expected returns.

An investment portfolio is important to constrcut as it minimises the diversifiable risk associated with the investment. A more number of investment in portfolio reduces the diversifiable risk. As there is no optimal numver of stock in portfolio but it is said as large number of stocks in portfolio reduces the risk to a maximum extent.

Yes if are owing more than 100 individual stock then this would reduce the exposure to risk as large diversification average out the risk

jeff jeffy answered 1 year ago

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