What Is the Connection Between Expected Return and Standard Deviation?

The so-called expected return standard deviation decision method refers to a risk-based decision-making method based on the expected return on investment and the standard deviation of returns.

Expected return standard deviation method

Right!

The so-called expected return standard deviation decision method refers to a risk-based decision-making method based on the expected return on investment and the standard deviation of returns.

Chinese name

Expected return standard deviation method

According to

Expected return on investment and standard deviation of return

Nature

Methods for making risky decisions

Field

economic

There are usually two specific approaches: ^[1]

This law can be described as follows: In the two items A and B, if one of the following two conditions is met, item A is better than item B:

(1) The expected return of A is greater than or equal to the expected return of B, and the standard deviation of A's return is less than the standard deviation of B's return. The formula is expressed as: E (A) E (B) and (A) <(B).

(2) The expected return of A is greater than the expected return of B, and the standard deviation of A's return is less than or equal to the standard deviation of B's return: E (A)> E (B) and (A) (B)

Because the standard deviation of returns represents the magnitude of risk. So this law means:

(1) Select projects with low risks when the returns are equal;

(2) Choose a project with a large return when the risks are equal.