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

  • variance

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.
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