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What is a Standard Deviation in Finance?

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Standard Deviation in finance refers to the volatility of different assets or investments. If you’re an investor, knowing the volatility of your investments and how they compare to other investments will help you make better decisions with your money by helping you identify which investments are likely to give you the most bang for your buck.

Use of Standard Deviation in Finance

Standard deviation is a statistical measure that finance professionals use to gauge the volatility of investments. By calculating the standard deviation of past returns, investors can get a sense of how much an investment’s value may fluctuate in the future. This information can help investors make decisions about whether an investment is right for them. Additionally, the standard deviation can be used to construct portfolios that are designed to minimize risk.

How Do You Calculate Standard Deviation Using Google Spreadsheets?

To calculate standard deviation using Google Spreadsheets, you first need to input your data. Then, you click on the Data tab and select Standard deviation from the drop-down menu. Next, you select the range of cells that contains your data. Finally, you click OK and the standard deviation will be calculated.

For example, if we are calculating the standard deviation for an average person's height, we would input: 

The average height is 68 inches (5'6) so our data would look like this: 

Height Range 68 - 70 69 - 71 70 - 72 71 - 73 72 - 74' 73 - 75' 74' - 76' 75' - 77'' 76'' - 78'' 77''- 79'' 78''- 80''. We would then highlight these seven cells. 

Next, we would go to the Data tab and choose Standard deviation from the drop-down menu. The spreadsheet would then automatically calculate our answer as 2.2.

How To Interpret Standard Deviation Using Visual Charts?

When it comes to statistics, the standard deviation is a measure of how spread out data is. In finance, it’s used to measure the volatility of investments. The higher the standard deviation, the more volatile the investment. If you’re investing for long-term growth, you’ll want lower risk with lower potential returns. If you’re investing for short-term gains (like when buying stocks), you’ll want high risk with potentially high returns. It’s important to know that an average return doesn’t guarantee that you will have a positive return on your investment. For example, if an average annual return on an investment is 7%, but the range of possible outcomes is from -5% to 12%, then there’s no guarantee that investors will see 7% or more on their investments in any given year.

Standard Deviation: Significance and Facts & Figures

A high standard deviation means that prices are spread out over a large range and are more volatile, while a low standard deviation indicates that prices are clustered closer to the average and are less volatile. While standard deviation can help gauge risk, it’s important to remember that it’s only one metric and should be considered alongside other measures.

The average stock market return is about 10% per year, which means that if you invest in the stock market, you can expect your investment to go up or down by about 10% each year. However, this number is just an average and does not take into account the volatility of the markets. For example, in 2008 the stock market crashed and many people lost a lot of money. However, those who invested wisely would have been able to recover some of their losses over time as the markets rebounded. If there was less volatility (lower standard deviation), then they would have had less risk of losing so much money when things went wrong.

Standard Deviation: Example 

If there is a lower risk, it’s indicated by a low standard deviation, but if the risk is higher, the standard deviation is higher. If you invest in a particular stock, the annual average return is $8 with a standard deviation of $6. Stock B has an average return of $11 per year, but a higher annual variance (of $10). As a result, Stock B is a riskier investment than Stock A.


Last Updated : 22 Sep, 2023
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