Three-Sigma Limits

AAA

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 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.

RELATED TERMS
  1. Balanced ANOVA

    A statistical test used to determine whether or not different ...
  2. Analysis Of Variances - ANOVA

    An analysis of the variation between all of the variables used ...
  3. Statistics

    A type of mathematical analysis involving the use of quantified ...
  4. Multiple Linear Regression - MLR

    A statistical technique that uses several explanatory variables ...
  5. Coefficient Of Variation - CV

    A statistical measure of the dispersion of data points in a data ...
  6. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
Related Articles
  1. Using Historical Volatility To Gauge ...
    Markets

    Using Historical Volatility To Gauge ...

  2. The Uses And Limits Of Volatility
    Markets

    The Uses And Limits Of Volatility

  3. Tips For Investors In Volatile Markets
    Investing

    Tips For Investors In Volatile Markets

  4. Find The Highest Returns With The Sharpe ...
    Bonds & Fixed Income

    Find The Highest Returns With The Sharpe ...

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center