standard deviation

(adjective)

The standard deviation of an investment is obtained by taking the square root of the variance. It has a more straightforward meaning than variance. It tells you that in a given year, you can expect an investment's return to be one standard deviation above or below the average rate of return.

Related Terms

Examples of standard deviation in the following topics:

  • Overview of How to Assess Stand-Alone Risk

    • Volatility is measured in the form of the investment's standard deviation from the mean return, thus the coefficient of variation is this standard deviation divided by expected return.

  • Variance

    • The standard deviation can be read as a percentage.
    • Calculate deviations from mean (blue), square the deviations (yellow), multiply the squared deviation by its original probability (orange).

  • Monte Carlo Simulation

    • The investor may also estimate that the inflation rate is normally distributed around a mean of 3% and standard deviation of 0.5%.

  • Announcements, News, and Returns

    • Volatility is measured as the standard deviation of S&P 500 one-day returns over a month's period.

  • A Random Walk

    • We assume the random disturbance is distributed normally with a mean of zero with a fixed standard deviation.

  • Portfolio Risk

    • Remember that the standard deviation answers the question of how far do I expect one individual outcome to deviate from the overall mean.

  • Sensitivity Analysis

    • Sensitivity analysis is a statistical tool that determines how consequential deviations from the expected value occur.

  • Conflicts of Interest Between Shareholders and Bondholders

    • The deviation from the principals' interests by the agent is called 'agency costs', which are often described as existing between managers and shareholders; but conflicts of interest can also exist between shareholders and bondholders.

  • Managers, Shareholders, and Bondholders

    • The deviation from the principal's interest by the agent is called 'agency costs. ' Agency costs mainly arise due to contracting costs and the divergence of control, separation of ownership and control and the different objectives of the managers and other stakeholders.

  • Setting a Credit Policy

    • To establish a credit policy, a company must establish credit standards, credit terms, and a collection policy.
    • Management must decide on credit standards, which involves decisions on how much credit risk to assume.
    • Another important factor in determining credit standards involves a company evaluating the credit worthiness, or credit score, of an individual or business.
    • After establishing credit standards, the firm must decide on the length of the period that would be allowed before payment must be made and whether or not they will offer a discount for early payments.