Standard Deviation | Investment Basics #14

In 2017, a standardized methodology for classifying risk was adopted by conventional mutual funds as well as exchange-traded funds. Prior to that, fund managers would assign the fund a risk rating. However, "medium" risk could also mean slightly different things to different fund managers.

The standardized methodology ranks funds by standard deviation as the sole measure of risk. Under this system, if a fund has a standard deviation of less than 6, it is considered a low-risk fund. On the other hand, if a fund has a standard deviation of 20 more, it's considered a high-risk fund. There is no need to memorize the various ratings as you can always look them up. However, you should know that funds are ranked according to standard deviation. This will be much easier for you to understand and remember if you have an understanding of what standard deviation of returns refers to.

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