Expected Return vs. Standard Deviation: What's the Difference?


Triston Martin

Nov 18, 2023

The most important concern for an investor is whether or not their money will increase in value and generate a return throughout their investment. There are a few different approaches, but no one can definitively tell you how much money you will earn or how much you will make in the future. When assessing the performance of their holdings, investors may use statistical tools such as anticipated returns and standard deviations. Two distinct measures may be used to quantify the anticipated returns and standard deviations of a portfolio. These metrics are expected returns and standard deviations. The anticipated return, as well as the standard deviation, is two factors that influence an investor's choice on whether or not to expose themselves to a high level of danger in the hopes of achieving enormous profits. Let us the Expected Return vs. Standard Deviation: What's The Difference.

Expected Return

The expected return refers to the total amount of money an investor anticipates gaining or losing on a certain investment or portfolio. Investors often use the expected return as a guide when making investment decisions. The forecasted return is determined using prior results as a basis. Consequently, it's not a good indicator of future performance and shouldn't be used only to guide business choices. This indication gives a good idea of what investors should expect in the immediate and long term.

It is possible to determine the mean or projected value of an investment's probability distribution if the investor is aware of the return anticipated from the investment. If the performance of a single stock isn't nearly as crucial to managers of hedge funds and mutual funds, then the portfolio's performance as a whole is.

Standard Deviation

How much an investment return diverges from its probability distribution's mean is measured by a portfolio's standard deviation. Investors may see how much the investment's actual return deviates from the forecasted one. Investors may use this indicator to estimate the annual return of an investment or a portfolio by taking into account the market's volatility in the past. It's a common method of assessing the real outcomes of a portfolio manager. The danger of using a portfolio boss who diverges too much from the mean may be considered by the fund operator. Especially if the fund has a large number of managers and a wide range of investing strategies

A standard deviation is a useful tool for measuring volatility in both the market as a whole and in specific assets. Using this knowledge, one may attempt to forecast whether or not an investment would be successful. The larger the standard deviation, the broader the range of possible values for the prices as compared to the mean. When it comes to the potential for loss and gain that is associated with an investment, a larger standard deviation is indicative of a greater degree of both uncertainty and danger.

Special Considerations

The expected return and standard deviation are two methods investors might use to evaluate the future performance of assets and portfolios. The majority of the time, it's a straightforward procedure. Investors, on the other hand, should not only depend on them while making investment decisions. For several equations, the basis for their computations is historical data. Therefore, they may not be a reliable indicator of future outcomes. There's no assurance that investment would do well in the next year just because it did well the prior year. However, other conditions may cause investments to deviate from their predicted outcomes. They include:

  • Changes in the economy
  • In the stock market
  • Resources' capacity and efficiency
  • Risks of inflation and currency devaluation
  • The market's current attitude and expectations
  • Besides these, there are several other factors to consider

Is The Standard Deviation The Similar As The Expected Return?

The potential of an investment may be measured against the return that an investor anticipates receiving from an investment. This forecast is derived from the data from the previous year. On the other hand, the standard deviation measures how much the actual return on an investment deviates from what was predicted for that investment. One that has a greater potential for loss is an investment that has a larger standard deviation.

The Final Words

First, it is necessary to understand what each word implies before examining the relationship between expected return and standard deviation. If a stock's previous performance is any indication, its expected return is the profit that investors may reasonably expect to make from owning that stock. One way to determine how far the stock has departed from its expected return is to look at the standard deviation. If a stock's standard deviation increases, the stock's predicted return may not be attained.


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