Which statistic is most directly used to quantify the volatility of investment returns?

• A. R-squared
• B. Mean
• C. Standard deviation
• D. Beta

Answer: (C)

Volatility measures how much investment returns swing from one period to the next. The statistic that directly captures that swing is the standard deviation, which measures how far individual returns typically lie from the average return. A larger standard deviation means returns are more dispersed and less predictable, i.e., more volatile.

R-squared looks at how well a model or benchmark explains the returns, not how spread out the returns are. The mean is simply the average return, not its variability. Beta indicates sensitivity to market movements (systematic risk), not the overall dispersion of returns. So, the standard deviation is the best direct measure of volatility.