Glossary
Standard deviation
A statistic that measures how widely values spread around their average; in finance, the standard yardstick for an asset’s volatility.
On this page
Standard deviation measures how far a set of numbers typically sits from its average. Applied to an investment's returns, it is the most common measure of volatility: a fund whose monthly returns swing between −8% and +9% has a much higher standard deviation than one that moves between −1% and +2%. It feeds into the Sharpe ratio, Bollinger Bands, option pricing and most risk models.
How it works
Dividing by n − 1 gives the sample standard deviation, the usual choice when working from historical data. Variance is the same figure before taking the square root.
How to read it
If returns were roughly bell-shaped, about two-thirds would fall within one standard deviation of the mean and about 95% within two. Real market returns have fat tails: moves of four or five standard deviations happen far more often than a normal curve predicts, as 1987, 2008 and March 2020 showed. Standard deviation also treats a surprise gain the same as a surprise loss, and it depends heavily on the period measured. It describes past dispersion; it does not cap future losses.