Financial Market and product risk

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Financial Market and product risk
. When making a decision to invest, it is advisable to do a risk estimation of the investment before pouring money into a venture which may collapse due to losses. This is because every investor is always yarning to get profits whereby the more the profits, the better the deal. However, finance knowledge indicates that the higher the risk the more the expected gain but this should not blind people to enter a venture without fully analysing the benefits and the losses associated with a venture. Therefore, it is wise to use some measurements which help in the estimation of the risks, gains and losses prior to investing (Brandon, Frank, 2005, 73). This is done by use of several tools. Among these is standard variation which is written about in depth in the following paragraphs. This paper defines standard deviation and how it is calculated. Also details are given on how to calculate standard deviation from a group of data, or variance or even from the mean. In addition, the disadvantages and advantages associated with the use of standard deviation in the estimation of risks for investment purposes are explained. Again, the paper tackles on the alternatives which can be used to curb down the disadvantages associated with risk estimation using standard deviation when some one wants to invest in venture to ensure that the best risk estimation is arrived at allowing fruitful investments
Standard deviation is the measure of the deviation from the average or mean of a set of data. In other words, it is the square root of variance (the dispersion of data). Standard deviation is usually higher in case the data is widely dispersed and vise versa. It is used in finance to measure the volatility of a business. It is used to represent the risk associated with financial securities. Because the increase of the risks is directly proportional to the expected, it can help investors evaluate the best avenues to invest (Schwartz, 2009, p.95). In this respect, standard deviation helps quantify the estimate of the uncertain future of the business or investment gains.
Standard deviation is estimated as the positive square root of variance. Variance on the other hand is a measure of distribution of data whereby it explains how the data lies far or near from the average. It therefore measures the dispersion of data (Nguyen, Robert, 2002, p.8). In terms of calculation, it is the mean of all deviations of a data from the mean itself. Also it is the square of the standard deviation.
The use of standard deviation in the estimation of risks has various advantages. Firstly, it helps one to be able to know and guess the expected returns in a certain investments and be able to decide whether to invest in the business venture or not (Blake, 2000, p.p.12). In other words, it acts as a decision making tool in investment. Secondly, when a person is able to guess the risks, he or she is ...