Business and Publishing Rotating Header Image

The Importance Of Standard Deviation

b3 The Importance Of Standard DeviationInvestors who believe that financial markets have evolved into “quants” versus “traditionalists” have forgotten the admonition that the investment industry is built on disagreement. There is ample disagreement as to the motivations to trade among quants and traditional investors alike. Therefore, it is a fiction to say that quants are on one side of trades and traditional investors are on the other. The investors in this case still could not, on average, beat the market. They were, however, able to avoid large negative variations through diversification. Because the concept of a standard deviation plays an important role in modern finance, it is useful to understand the basics of this popular statistical measure.

A standard deviation is a measure of variability around a mean. If it is assumed that the observations of a given characteristic, or value, cluster around the mean in a normal fashion, the computed standard deviation has a very convenient property: 68.0 percent of the values fall within plus or minus one standard deviation from the mean; 95.5 percent of the values fall within plus or minus two standard deviations from the mean; and 99.7 percent of the values fall within plus or minus three standard deviations from the mean.

Because 68.0 percent is very close to two-thirds (66.7 percent), a convenient rule of thumb is that the chances are two out of three that an expected value will fall within one standard deviation (plus or minus) of the mean. The key point to remember is that the smaller the standard deviation, the smaller the probability of a result that is far from the mean.

Keyword terms to this post:

Importance of standard deviation, significance of standard deviation, importance of standard deviation in business, the importance of standard deviation, standard deviation importance, standard deviation in business, why is standard deviation important, what is the importance of standard deviation, use of standard deviation in business, uses of standard deviation in business, Standard Deviation in Business Decisions, why standard deviation is important, importance of standard deviation and variance, why standard deviation and variation are important, why is standard deviation important in criminology?, why standard deviation is important?, why is mean and standard deviation important in life, whats important range variance standard deviation, what is the importance of standard deviation in science, What is the importance of finding the range/standard deviation?

Leave a Reply