Complete Guide To Investment Companies, Funds And REITs

AAA

Introduction - Standard Deviation

Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation, while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.

Standard deviation is so widely used because it is expressed in the same units as the original data, so it is easy to interpret and can be used on distribution graphs (e.g., the normal distribution).

As it relates to investing, an index fund can be expected to have a low standard deviation versus its benchmark index, as the fund's goal is to replicate the index. Aggressive growth funds, on the other hand, can be expected to have standard deviation as the portfolio manager makes aggressive bets in an effort to generate higher-than-average returns.

While, intuitively, a lower standard deviation may seem preferable, that is not necessarily the case. When considering the amount of deviation in a portfolio, investors should consider both their personal tolerance for portfolio volatility and the investment objective of the strategy under consideration. More aggressive investors may be comfortable with an investment strategy that offers higher-than-average volatility, while more conservative investors may not.

Related Readings:

Turnover
Related Articles
  1. The iShares FTSE China 25 Index Fund etf has become popular with investors seeking China exposure. Here's why.
    Stock Analysis

    This ETF Offers Easy Access To China's ...

  2. Africa's economic growth and growing stability has gotten the attention of adventurous investors. What kind of ETF or mutual fund options are available?
    Mutual Funds & ETFs

    Destination Africa: These Funds Offer ...

  3. Forex

    Ways To Earn Bitcoins

  4. With its huge population and booming economy, China is tops for many emerging markets investors. Here's a leveraged ETF for those who want to double down.
    Stock Analysis

    This Leveraged ETF Is For China Bulls

  5. These ETFs are an excellent place to start for any investor interested in betting on Latin America.
    Mutual Funds & ETFs

    Interested In Latin America? Eye These ...

Trading Center