Measures of Risk

Standard Deviation


Standard deviation is a measure of how volatile a stock is, compared to its average return. Highly volatile stocks are less predictable, while less volatile stocks are more predictable. 


Standard deviation is measured as a percentage and indicates how far a stock moves from its average return over time. A higher standard deviation % means that the stock deviates greatly from the average.


It is calculated by firstly finding the average return of a stock over a certain period of time. You then subtract the mean from each annual return and square each calculation by 2. You then add them together.


Once added together, you divide the number by the total number of years minus 1. To finally find the standard deviation, you find the square root of this number. The lower the number, the better.

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