Question

If holding assets in a diversified portfolio, why is standard deviation the appropriate measure of risk for the portfolio?

Answer 1

Standard deviation gives the deviation from the mean which tells about the uncertainty in the return, this uncertainty in return is known as risk. In diversified portfolio there is many asset class and all gives different return to measure the reutrn as per risk one should use standard deviation. In this way one can compare the return of asset with respect to risk or standard deviation .

Higher the return most probably have higher risk means standard deviation and vice versa.