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What Does High Standard Deviation of NAV Prices Reveal About Fund Volatility?
Understand the implications of a high standard deviation in Net Asset Value (NAV) prices. Learn how this key statistical measure signifies greater volatility and variability, helping you assess investment risk for your finance and data analysis certifications.
Question
During observation of NAV prices, what does high standard deviation indicate?
A. The NAV is always increasing
B. Greater volatility and variability in NAV values
C. The fund is risk-free
D. The dataset is free from errors
Answer
B. Greater volatility and variability in NAV values
Explanation
High deviation means the values fluctuate widely. Standard deviation is a fundamental statistical measure used to quantify the amount of variation or dispersion of a set of data values.
Standard Deviation as a Measure of Risk
In finance, standard deviation is a widely used indicator of risk. When applied to the Net Asset Value (NAV) of an investment fund, a high standard deviation means that the NAV has fluctuated significantly over a period of time. These wide swings indicate that the fund’s returns are less predictable, which corresponds to higher volatility and, consequently, higher risk. Conversely, a low standard deviation suggests that the NAV has been relatively stable, implying lower volatility and risk.
Interpretation in Context
A high standard deviation is not inherently “bad,” nor is a low one inherently “good.” It is a measure that must be interpreted in the context of an investor’s risk tolerance and investment goals. An investor seeking high growth might be comfortable with the higher risk associated with a fund that has a high standard deviation, as high volatility can lead to high returns as well as significant losses. In contrast, a more conservative investor would likely prefer a fund with a low standard deviation, prioritizing capital preservation over the potential for high returns.
Evaluation of Other Options
A. The NAV is always increasing: This is incorrect. A high standard deviation only indicates that the values are spread out around the mean; it does not provide information about the direction of the trend. The NAV could be increasing, decreasing, or fluctuating without a clear trend.
C. The fund is risk-free: This is the opposite of what a high standard deviation indicates. A risk-free asset would have a standard deviation of zero.
D. The dataset is free from errors: This is incorrect. Standard deviation is a measure of variability in the data, not a tool for detecting errors. A dataset can have errors regardless of its standard deviation.
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