In modeling market indices, which parameter is used to represent the variability of returns around the mean?

• A. Growth Characteristics
• B. Rate of Return
• C. Standard Deviation
• D. Mean Rate

Answer: (C)

This question tests how we quantify how much returns vary around the average in market models. The standard deviation is the measure of this variability, capturing the dispersion of returns around the mean. A higher standard deviation means returns swing more, signaling greater volatility and risk. The rate of return describes the average gain but not how spread out the outcomes are, so it doesn’t reflect variability. The mean rate is just the central tendency, not the spread, and growth characteristics isn’t the standard term used to describe return dispersion. Because standard deviation directly measures how far returns deviate from the average, it best represents the variability around the mean.