8.41What is standard deviation?
1What is it?
Standard deviation (SD) measures how much a fund’s returns swing around their average. Higher SD = more volatile.
2Why does it exist?
Two funds with 12% average returns can feel very different: one steady, one wild.
3Calculation
SD = √(Average of (each return − mean)²)
- Fund A returns: 10%, 12%, 14% → mean 12%, SD ≈ 1.6%.
- Fund B returns: −8%, 12%, 32% → mean 12%, SD ≈ 16.3%.
Same average, but B is ~10× more volatile.
4Quick revision
- SD = volatility.
- Compare within category.
- Lower SD for same return is better.
5Knowledge check
Q1. Higher SD means?Show answer
More volatility.
Q2. Two funds, same return; one has lower SD. Prefer?Show answer
Lower SD.
Q3. Is SD the only risk measure?Show answer
No; also drawdown, Sortino, etc.
See it live on MojoStox