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Finance and banking is all about measuring and managing risk and standard deviation measures risk (Volatility). Perhaps standard deviation is the most important concepts as far as finance is concerned. So it makes you ignore small deviations and see the larger one clearly! The square of small numbers is smaller (Contraction effect) and large numbers larger (Expanding effect). It squares and makes the negative numbers Positive It measures the deviation from the mean, which is a very important statistic (Shows the central tendency) Standard deviation has its own advantages over any other measure of spread. Use VarP for Measuring Variance Reasons why Standard Deviation is very Popular Use StdevP for Measuring Standard Deviation It does all the number crunching on its own! Just use the function, StdevP or VarP and show it the data. Takes the average of these squared differencesĮxcel makes your life easier. Squares the differences (So that positives and negatives all become positive) Measures the spread (Differences of individual data points) from the mean Just like Range gave us the simple measure of spread by telling us the Min and Max values of data, we have another measure called standard deviation (or an equivalent measure called variance) to measure spread.
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Measuring Spread Using Standard Deviation It would be the same for data sets that are uniform, but have an extreme min and max and same for skewed data around min and max.Įxcel gives simple functions to calculate Range.
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It gives me a fair idea of spread.īut it again gives me only half of the story. I would say that the simplest measure is Range. If I were to ask you the simplest measure of spread, what would pop in your mind? Nay don’t tell me that standard deviation or variance (95% of the times I get this as the answer)! I love asking this question in all the workshops that I take! So we need to measure spread (which is akin to risk!) Measuring Spread (Risk) using Range It says that you can generate 25% return, but does not tell you that the return can be -10% to 60%, so that the average would be 25% (But you might have to exit at -10%). It gives you the central value of data, but does not tell you about the spread.
WHAT IS AN ACCURATE STANDARD DEVIATION FULL
They dont like to invest in shares that go up and down everybody wants a stable life! Business ConsiderationĪverage return (or for that matter any average), never tells you the full story. But now the life is not that easy, Managers understand Risk.
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If it had been the good old pre quantitative heavy investing days, I know you would have gladly invested in XYZ. If I see any other stock, I would not be able to generate more than 20%. If you invest in XYZ shares (assume that we are listed) you can generate an average year on year return of 25%. The larger this dispersion or variability is, the higher is the standard deviation. Dispersion is the difference between the actual and the average value. Technically it is a measure of volatility. Hence,standard deviation is an indication of the precision of repeated measurement.so option (c) is correct.Standard Deviation is a statistical term used to measure the amount of variability or dispersion around an average. Since standard deviation tells the deviation from mean value but the accuracy tells how close to the exact value of any measurement.hence, option (b) is also incorrect. Since mean cannot be determined for any given single measurement so precision cannot be determined for a single measurement.therefore,option (a) is incorrect. The measured value which is close to the exact value is called accuracyįrom the above definitions, it is evident that standard deviation is the deviation of a group of measurements from their mean value and also the precision tells how close a particular measurement is from its mean measurement value. Precision means how close is the value from the previously measured value of any measurement.precision does not refer to the true value. If most of the numbers are close to the mean value, the standard deviation will be low and if the numbers are more spread out standard deviation will be high. A number which is used to inform how measurements for a group are spread out from the mean value is called standard deviation.