A statistical measure that quantifies the amount of variation or dispersion in a set of data values. In finance, it measures how much investment returns deviate from their average, serving as a key indicator of risk and volatility.
Compound term from 'standard' (from Old French 'estandard' meaning upright pole/banner) and 'deviation' (from Latin 'deviare' meaning to turn aside from the way). The statistical concept was formalized by Karl Pearson in 1893, later applied to finance in the early 1900s.
Standard deviation in finance follows the famous '68-95-99.7 rule' - about 68% of returns fall within one standard deviation of the average! So if a stock has 10% average returns with 15% standard deviation, you can expect returns between -5% and +25% about two-thirds of the time.
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