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Finance Dictionary and Glossary of Investment Terms
The square root of the variance. A measure of dispersion of a set of data from its mean.
A statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, a measure of the extent to which numbers are spread around their average.
A measure of a mutual fund''s volatility, standard deviation is a statistical measure of the range of a fund''s performance. The higher the number the greater the volatility. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund''s total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund''s returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund''s volatility.For example, an investor can compare two funds with the same average monthly return of 5.0%, but with different standard deviations. The first fund has a standard deviation of 2.0, which means its range of returns for the past 36 months has typically remained between 1% and 9%. On the other hand, assume that the second fund has a standard deviation of 4.0 for the same period. This higher deviation indicates this fund has experienced returns fluctuating between -3% and 13%. With the second fund, an investor might expect greater volatility.
1. A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. 2. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility (risk).