Standard Deviation
Definition
A statistical measure of the dispersion of returns around the mean — the most common measure of investment volatility.
Explanation
Standard deviation measures how much individual returns deviate from the average return. A stock with 15% annual standard deviation will, about 68% of the time, deliver returns within 15 percentage points of its average. Within 2 standard deviations covers about 95% of returns. Higher standard deviation means more volatility and uncertainty. The S&P 500's historical annualized standard deviation is approximately 15-16%. Individual stocks typically range from 20% (stable blue chips) to 60%+ (speculative biotech).
Formula
σ = √[Σ(Ri - R̄)² / (n-1)]
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