#
**MEASURING PORTFOLIO RISK**

*standard deviation*and the

*variance*. The former is the intuitive concept. Most of any probability distribution is between its average plus or minus two standard deviations. Variance is standard deviation squared. Computations are simplest in terms of variance. Therefore, it is convenient to compute the variance of a portfolio and then takes its square root to obtain standard deviation.

^{13}

##
**Variance and Standard Deviation as a Measure of Risk**

*i*, denoted var(

*R*

_{i}), is

*R*

_{i}) =

*p*

_{1}[

*r*

_{1}–

*E*(

*R*

_{i})]

^{2}+

*p*

_{2}[

*r*

_{2}–

*E*(

*R*

_{i})]

^{2}+ . . . +

*p*

_{N}[

*r*

_{N}–

*E*(

*R*

_{i})]

^{2}

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