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. Legal Monopoly

    A company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated.
  2. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  3. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  4. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  5. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  6. 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.
Trading Center