Standard deviation measures how widely observations vary around their mean. It equals the square root of variance, returning dispersion to the original units instead of squared units. section 3.4.2 section 7.2.2
In financial analysis, standard deviation provides a practical view of fluctuation. Calculate it on prices or, more meaningfully for comparison, on percentage or logarithmic returns. section 3.4.2 section 7.2.2
Interpret standard deviation alongside related statistics:
- Mean identifies the dataset’s central value; standard deviation describes its spread around that value. section 3.4.2
- Variance contains the same dispersion information in squared units, making it more useful for theory than direct interpretation. section 7.2.2
- Higher return standard deviation signals larger observed fluctuations, but does not by itself establish future performance or risk. section 3.4.2
Comparing return dispersion
A summary of 2023 log returns reports standard deviations of 0.134959 for Coca-Cola, 0.199222 for Apple, and 0.799615 for NuScale. NuScale therefore showed the greatest observed dispersion in that dataset, while the comparison remains historical rather than predictive. section 3.4.2
