Fam Wencong, Kenneth

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How To Measure Risk: Standard Deviation As A Measure

Published: Saturday, May 16, 2020

In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (also called the expected value) of the set, while a high standard deviation indicates that the values are spread out over a wider range. 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.

How To Calculate Standard Deviation

OK. Let us explain it step by step.

Say we have a bunch of numbers like 9, 2, 5, 4, 12, 7, 8, 11.

To calculate the standard deviation of those numbers:

  1. Work out the Mean (the simple average of the numbers)
  2. Then for each number: subtract the Mean and square the result
  3. Then work out the mean of those squared differences.
  4. Take the square root of that and we are done!