Standard Deviation
Candlefocus EditorMany investments have a certain amount of risk associated with them, which can affect their performance and returns. The higher the standard deviation, the higher the risk of the asset. For example, a volatile stock such as a technology start-up may have a high standard deviation, meaning its rate of return and stock price could correspondingly jump around quite a bit. Blue-chip stocks, on the other hand, typically have a lower standard deviation and are more stable in terms of their rate of return.
Investors should be aware of the downsides to the standard deviation. It is a measure of all uncertainty, even that which is advantageous to the investor. This means that if an asset has above-average returns, it could be attributed to the uncertainty associated with the stock, rather than any legitimate positive underlying factor. Therefore, an investor may do well to consider other measures of performance, such as the Sharpe ratio, to get an idea of the true performance and risks of an asset.
Overall, standard deviation is a hugely beneficial tool for financial analysis, as it can quickly identify the volatility and risk associated with an asset. Although it is important to remember the drawbacks that come from relying solely on standard deviation, it can be a great start for investors who are looking to get an overall picture of the uncertainties that come with any given investment.