What Is Standard Deviation?
Standard deviation is a statistical measure that quantifies the dispersion or variability of a data set around its mean (average). In finance and investment, standard deviation is often used as an indicator of risk or volatility. A higher standard deviation indicates greater variability in the data set or more volatility in a financial asset, while a lower standard deviation indicates less variability or lower volatility.
Example: For the data set [1, 3, 3, 6, 7, 8, 9], the standard deviation is 2.92
Usage: In financial markets, standard deviation is commonly used as a measure of an asset’s volatility, which helps investors and traders understand the asset’s risk profile. A higher standard deviation implies more unpredictability in price movement, signaling higher risk, while a lower standard deviation indicates less risk and more stable returns.
Standard deviation and volatility are closely related concepts, especially in the context of finance. Volatility is essentially a practical application of standard deviation, often used to gauge the risk associated with different financial instruments.
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