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Standard Deviation

Standard deviation is a statistical measurement that indicates the dispersion of data points from the mean, with higher values indicating greater variability. It is commonly used in finance to assess the riskiness of assets and is calculated through a series of steps involving the mean and variance of the dataset. The formula for standard deviation involves taking the square root of the variance, which reflects how data points compare to the collective mean.

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14 views2 pages

Standard Deviation

Standard deviation is a statistical measurement that indicates the dispersion of data points from the mean, with higher values indicating greater variability. It is commonly used in finance to assess the riskiness of assets and is calculated through a series of steps involving the mean and variance of the dataset. The formula for standard deviation involves taking the square root of the variance, which reflects how data points compare to the collective mean.

Uploaded by

Reynaldo Brao
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Standard Deviation

What Is Standard Deviation?

Standard deviation is a statistical measurement that looks at how far individual points in a
dataset are dispersed from the mean of that set. If data points are further from the mean, there
is a higher deviation within the data set. It is calculated as the square root of the variance.

 Standard deviation, in finance, is often used as a measure of the relative riskiness of an


asset.
 A volatile stock has a high standard deviation, while the deviation of a stable blue-chip
stock is usually rather low.
 Standard deviation is also used by businesses to assess risk, manage business
operations, and plan cash flows based on seasonal changes and volatility.

Why do we calculate standard deviation?

Standard deviation gives a good idea of the "shape" of a data set. It also holds several
important properties for normal distributions, and it can be used to determine if a given data set
is not normally distributed.

How is standard deviation calculated?

Standard deviation is calculated as follows:

1. Calculate the mean of all data points. The mean is calculated by adding all the data
points and dividing them by the number of data points.
2. Calculate the variance for each data point. The variance for each data point is calculated
by subtracting the mean from the value of the data point.
3. Square the variance of each data point (from Step 2).
4. Sum of squared variance values (from Step 3).
5. Divide the sum of squared variance values (from Step 4) by the number of data points
in the data set less 1.
6. Take the square root of the quotient (from Step 5).
Standard Deviation Formula

Standard deviation is calculated by taking the square root of a value derived from comparing data points
to a collective mean of a population. The formula is:

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