In both hedge fund and mutual fund evaluations is standard deviation.
The standard deviation is a quantitative measure of the stock’s risk. The lower the standard deviation, the lower is the variability or risk of the investment. In a normal distribution of data, two-thirds of the monthly returns in the distribution fall within plus or minus one standard deviation from the mean. The basic idea is that the standard deviation is a measure of volatility: the more a stock's returns vary from the stock's average return, the more volatile the stock. Consider the following two stock portfolios and their respective returns (in per cent) over the last six months. At this point, we know that standard deviation is a measure of risk (or volatility) and that the number of standard deviations determines the reliability. So here's how it works in the investing world. Let's say you own a mutual fund that has a standard deviation of 21% and an average annual return of 8%. DEFINITION of 'Standard Deviation'. 1. A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. 2. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard Deviation The most common risk measure used in both hedge fund and mutual fund evaluations is standard deviation. Standard deviation in this case is the level of volatility of returns measured in percentage terms, and usually provided on an annual basis. Understanding Standard Deviation as a Measure of Risk. In the investing world, two of the most important concepts are risk and return. Most people understand the return part, which is the amount of gain or profit produced by an investment, but the risk part is much less clear.
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standard deviation measures what kind of risk