Dispersion

Dispersion Definition

In finance, dispersion describes a range of possible returns for an investment. It is a way to measure the riskiness of an investment. If the dispersion is wide, then there are many possible values for the return on that investment – so it is a risky investment. If the dispersion is narrow, then there are fewer possible values for the return on the investment – so it is a safer investment.

This term essentially measures the anticipated volatility of an investment. Measuring this type of risk will require estimates or figures for expected return on the investment, probabilities for the expected returns, and standard deviations. It is just one way to measure the riskiness of an investment.

Example

For example, imagine a stock with an expected return of 15% and a range of possible returns spanning from 10% to 20%. The range of possible outcomes is not very widely dispersed. For this simple example, it is certain that the outcome will fall between 10% and 20%. This investment would have a narrow dispersion and would be considered a fairly safe investment.

On the other hand, consider a stock with an expected return of 25% and a range of possible returns spanning from 0% to 50%. The range of possible outcomes is widely dispersed. Furthermore, it is certain that the outcome will fall between 0% and 50%; however, that’s a wide range. As a result, this investment would have a wide dispersion and would be considered a risky investment.

dispersion

See Also:
Company Life Cycle
Annual Percentage Rate (APR)
Adjusted Present Value (APV) Method of Valuation
Allowance for Uncollectible Accounts
Net Operating Loss Carryback and Carryforward

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