Standard Deviation (Investing)
What Is Standard Deviation in Investing?
Standard deviation measures how much an investment’s returns vary from its average return over time. It is a statistical indicator used to evaluate investment volatility.
Higher standard deviation suggests greater variability in returns.
Why It Matters
Standard deviation helps investors understand how consistent or unpredictable an investment’s performance may be. Investments with higher standard deviation may produce larger gains but also larger losses.
This measure helps investors assess portfolio risk.
How Standard Deviation Works
Standard deviation analyzes how far individual returns deviate from the average return.
If returns fluctuate widely, the standard deviation will be high. If returns remain close to the average, the standard deviation will be low.
Portfolio managers often use this measure to evaluate risk and diversify portfolios.
Example
A stock that frequently rises or falls dramatically may have a high standard deviation compared to a stable bond investment.
Standard Deviation vs Volatility
- Standard deviation is a statistical measure used to quantify volatility.
- Volatility is the broader concept describing price fluctuations.
FAQs About Standard Deviation
Is higher standard deviation always bad?
Not necessarily. Higher risk may also bring higher potential returns.
Do diversified portfolios reduce standard deviation?
Often yes, because diversification spreads risk across multiple assets.
Do mutual funds report standard deviation?
Yes. Many fund reports include it as a risk indicator.
Related Terms
