Three-Sigma Limits

Filed Under:
Dictionary Says

Definition of 'Three-Sigma Limits'


A statistical calculation that refers to data within three standard deviations from a mean. Three-sigma limits (3-sigma limits) are used to set the upper and lower control limits in statistical quality control charts. Control charts are used to establish limits for a manufacturing or business process that is in a state of statistical control.

Control charts are based on the theory that even in perfectly designed processes, a certain amount of variability in output measurements is inherent. Variations in process quality due to random causes are said to be in-control; out-of-control processes include both random and special causes of variation. Control charts are intended to determine the presence of special causes.

Control charts are also known as Shewhart charts after Walter A. Shewhart, an American physicist, engineer and statistician (1891-1967).

Investopedia Says

Investopedia explains 'Three-Sigma Limits'


Shewart set 3 standard deviation (3-sigma) limits as "a rational and economic guide to minimum economic loss." 3 sigma limits set a range for the process parameter at 0.27% control limits. A standard deviation is a statistical measurement of variability, showing how much variation exists from a statistical average. Low values indicate that the data points fall close to the mean (average); high values indicate the date is widespread and not close to the mean.

Investors use standard deviation to gauge expected volatility - this is known as historical volatility.

comments powered by Disqus
Hot Definitions
  1. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  2. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
  3. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  4. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  5. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  6. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
Trading Center