What is the importance of the standard deviation in interpreting and drawing conclusions about risk?© BrainMass Inc. brainmass.com September 27, 2022, 10:54 am ad1c9bdddf
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Standard Deviation as a Measure of Risk
The standard deviation is often used by investors to measure the risk of a stock or a stock portfolio. The basic idea is that the standard deviation is a measure of volatility: the more a stock's returns vary from the stock's average return, the more volatile the stock.
The standard deviation formula is very simple: it is the square root of the variance. It is the most commonly used measure of spread.
An important attribute of the standard deviation as a measure of spread is that if the mean and standard deviation of a normal distribution are known, it is possible to compute the percentile rank associated with any given score. In a normal distribution, about 68% of the scores are within one standard deviation of the mean and about 95% of the scores are within two standard deviations of the mean.
The standard deviation has proven to be an extremely useful measure of spread in part because it is mathematically tractable. Many formulas in inferential statistics use the standard deviation.
Standard deviation (represented by the symbol ?) shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data points are spread out over a large range of values.
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