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Reviewed by Sep 14, 2021| Updated on
Dispersion refers to a statistical term which depicts the size of the distribution of values expected for a specific variable. Dispersion can be estimated by several different statistics, such as range, variance, and standard deviation.
The application of dispersion is found in different fields like economics and business analysis and forecasting, to predict the daily weather conditions, etc. especially in making predictions for future purposes.
Dispersion can be defined in financial and investing terminology as the range of possible returns on investment. But it can also be used to compute the inherent or default risk in a particular security or investment portfolio. It is often represented as a yardstick of the extent of uncertainty, and therefore the risk associated with a specific security or investment portfolio.
The measures of dispersion are used for defining the data spread or its variation around a central value. Two different samples may have an equal mean or median, but completely different variability levels, or vice versa. A proper description of a data set should include both of these characteristics. There are various methods that can be used to measure the dispersion of a dataset, having both pros and cons.
The term dispersion has mostly seen a reference in investments and finance. Investors can choose from several thousand promising securities to put their money in and many determinants are present to weigh the best option for investment. One of the determinants is the risk profile of the investment. Most of the securities have fact sheets or prospectuses accessible on the internet under the name of the Exchange Traded Funds (ETF) or mutual fund that listing these statistics.
Dispersion can be computed using alpha and beta, which measure the risk-adjusted returns and the returns relative to a benchmark index, respectively.
The dispersion is one such statistical measure to give an outlook. The dispersion of return on an asset portrays the volatility and risk pertaining to withholding that asset. The higher the return on an asset, the greater the risk or volatility. For example, an asset whose past returns in any given year would range between +10% to -10% is further volatile. It is because of the returns that are more widely dispersed than an asset whose past return ranges from +3% to -3%.
Price dispersion in Economics is variation in prices across sellers of the item, having the same characteristics of the items sold by a seller. Price dispersion can be observed as a measure of trading frictions or as a violation of the law of one price. It is often associated with the consumer search costs or unmeasured attributes of the retailing outlets involved. There is some evidence of deflating online price dispersion, but it remains significant. Market researchers have observed that in e-commerce, specifically, the Semantic Web has effects on price dispersion too.