Description
In finance, standard deviation is a statistical measure of the dispersion or variability of returns for a particular investment or portfolio. It quantifies the extent to which the returns of an asset or portfolio deviate from its average or expected return. A higher standard deviation indicates that the returns are more spread out, implying greater volatility and hence higher risk. Standard deviation is a crucial tool for assessing risk in investment decision-making as it provides insights into the potential range of outcomes or fluctuations in returns over a given period. Investors and portfolio managers use standard deviation to understand the level of uncertainty associated with an investment, construct diversified portfolios to mitigate risk, and evaluate the risk-return trade-off of different investment opportunities. Additionally, standard deviation is commonly used in various financial models and calculations, such as the calculation of the Sharpe Ratio or in determining confidence intervals for investment performance.