Dispersion, also known as “Deviation”, is the measure of how widespread an investment or portfolio returns are over a given period of time. It allows an investor to assess their level of risk when investing. Dispersion provides an assessment of how much risk an investment could potentially incur and provides insight into the spread of returns.

Dispersion can be measured using alpha, beta, and standard deviation of returns. Alpha considers the risk-adjusted returns of an investment, relative to a benchmark index. Beta measures risk by comparing the volatility of a security’s returns to that of the benchmark, such as the S&P 500. Standard deviation measures the spread of the returns of the investment away from the mean. Generally speaking, the higher the dispersion, the more volatile the investment can be and therefore more risky.

When assessing an investment, it is important to consider the level of dispersion. A high level of dispersion can indicate high levels of risk and potential for large losses or large returns. Conversely, a low level of dispersion may mean that an investment is more stable and could offer more consistent but lower returns. Dispersion should be considered in combination with other risk measures, such as Sharpe ratio and portfolio value at risk.

Dispersion allows investors to better understand the range of potential outcomes from an investment, identify potential risk factors and make informed decisions about their portfolio. It is an important tool for assessing investments that can provide potential returns and help manage risk.