The standard deviation and  VaR techniques

The standard deviation and  VaR techniques

1. Investors usually analyze risks before making investments by using multiple methods such as standard deviation, VaR, CVaR, and beta. The investors are supposed to mitigate the risks after identifying it. The beta method involves the measurement of methodical risks in case of an individual security.

The standard deviation method involves the measurement of dispersed data. The SD method helps in identifying the deviation of the current return from previous returns. For example, a high SD stock will have high volatility, and it also implies that the levels of risk associated with the stock are high as well. The method also measures consistency.

2. While making any investment-related decisions, risk management is necessary, and analysts use the method for reducing the levels of risk. Usually, the conventional methods include VaR, standard deviation, beta, and CVaR.

The VaR technique is based on statistics, and it is used for assessing the risk level in a portfolio as well as in a company. The method is useful as it measures the highest degree of risks for a specific amount of time. For instance, a portfolio of deals consists of a one-year 10% VaR of $5 million. Hence, it has a 10% likelihood of trailing an amount of more than $5 million within one year.