What is standard deviation?
The standard deviation is the measure of the dispersion of a data set from its mean. It measures the absolute variability of a distribution; the greater the spread or variability, the greater the standard deviation and the greater the magnitude of the deviation of the value from its mean.
The concept of standard deviation was introduced by Karl Pearson in 1893. It is by far the most important and most commonly used measure of dispersion. Its importance lies in the fact that it is free from those defects affecting previous methods and meets most of the properties of a good level of dispersion. The standard deviation is also known as the root mean square deviation because it is the square root of the means of the squared deviations from the arithmetic mean.
In financial terms, the standard deviation is used to measure the risks associated with an investment vehicle. The standard deviation provides investors with a mathematical basis for making decisions about their investment in the financial market. Standard deviation is a common term used in dealing with stocks, mutual funds, ETFs, and others. Standard deviation is also known as volatility. It gives a sense of how distributed the data is in a sample from the mean.
For individual observations, the standard deviation can be calculated in one of two ways:
1. Take the deviation of the articles from the actual mean
2. Take the deviation of the article from the assumed mean
In the case of a discrete series, one of the following methods can be used to calculate the standard deviation:
1. Actual middle method
2. Adopted middle method
3. Step deviation method