Empirical Rule

Loading the player...

What is the 'Empirical Rule'

The empirical rule is the statistical rule stating that for a normal distribution, almost all data will fall within three standard deviations of the mean. Broken down, the empirical rule shows that 68% will fall within the first standard deviation, 95% within the first two standard deviations, and 99.7% will fall within the first three standard deviations of the mean.

Also referred to as the Three Sigma Rule, or the 68-95-99.7 Rule.

BREAKING DOWN 'Empirical Rule'

The Empirical Rule is most often used in statistics for forecasting final outcomes. After a standard deviation is calculated, and before exact data can be collected, this rule can be used as a rough estimate as to the outcome of the impending data. This probability can be used in the meantime as gathering appropriate data may be time consuming, or even impossible to obtain.

RELATED TERMS
  1. Residual Standard Deviation

    A statistical term used to describe the standard deviation of ...
  2. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  3. Standard Error

    The standard deviation of the sampling distribution of a statistic. ...
  4. Downside Deviation

    A measure of downside risk that focuses on returns that fall ...
  5. Bell Curve

    The most common type of distribution for a variable. The term ...
  6. Three-Sigma Limits

    A statistical calculation that refers to data within three standard ...
Related Articles
  1. Markets

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.
  2. Managing Wealth

    Standard Deviation

    Learn about how standard deviation is applied to the annual rate of return of an investment to measure the its volatility.
  3. Trading

    Trading With Gaussian Models Of Statistics

    The entire study of statistics originated from Gauss and allowed us to understand markets, prices and probabilities, among other applications.
  4. Managing Wealth

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  5. Trading

    How To Convert Value At Risk To Different Time Periods

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  6. Investing

    A Simplified Approach To Calculating Volatility

    Volatility is sometimes greater than anticipated, but the way it’s measured can compound the problems that occur when it’s unexpected.
  7. ETFs & Mutual Funds

    Are Your ETFs Too Risky? Learn How to Evaluate Them

    Learn how to identify ETFs with greater risk and volatility. See why some investors include higher volatility ETFs in pursuit of greater returns.
  8. Investing

    The Linear Regression Of Time and Price

    This investment strategy can help investors be successful by identifying price trends while eliminating human bias.
  9. ETFs & Mutual Funds

    PRHSX: T. Rowe Price Health Sciences Fund Risk Statistics Case Study

    Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk.
  10. Managing Wealth

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
RELATED FAQS
  1. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of, and mathematical principles behind, standard deviation as a measurement of portfolio ... Read Answer >>
  2. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation and how it is used to measure risk in the investment ... Read Answer >>
  3. What is the difference between standard deviation and average deviation?

    Understand the basics of standard deviation and average deviation, including how each is calculated and why standard deviation ... Read Answer >>
  4. What is standard deviation used for in mutual funds?

    See how standard deviation is helpful in evaluating a mutual fund's performance. Use it in combination with other measurements ... Read Answer >>
  5. How is risk aversion measured in Modern Portfolio Theory (MPT)?

    Find out how risk aversion is measured in modern portfolio theory (MPT), how it is reflected in the market and how MPT treats ... Read Answer >>
  6. What is the difference between standard deviation and mean?

    Understand the basics of calculating and interpreting mean and standard deviation and how these mathematical fundamentals ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center