Why is standard deviation preferred over variance for measuring investment risk?

Standard deviation is preferred over variance for measuring investment risk primarily because it deals with regular units rather than squared units. When calculating variance, the results are expressed in squared units, which can be less intuitive for understanding risk in the context of financial returns.

In contrast, standard deviation takes the square root of the variance, bringing the measure back into the same units as the original data (e.g., percentage returns). This makes it more comprehensible for investors and analysts when assessing the volatility of returns. Using standard deviation allows for easier comparison between the risks of different investments and helps in making more informed decisions.

The ability to interpret risk in a relatable manner is crucial for investors who need to assess their potential returns against their risk tolerance. By expressing risk in regular units, standard deviation provides a clearer view of how much an investment’s returns can deviate from the expected outcome, which is fundamental in investment analysis.