Standard Deviation

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion in a set of data points. In finance, it is often used to measure the volatility of an asset’s returns. A higher standard deviation indicates greater volatility, meaning the asset's price can fluctuate widely from its average return. Standard deviation is an essential tool for assessing risk, as assets with higher standard deviations are considered riskier investments.

Example

A stock with an average return of 8% and a standard deviation of 5% means its returns can vary between 3% and 13% most of the time, reflecting higher volatility.