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Standard Deviation

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Definition:

Standard deviation is a statistical measurement that shows how much variation there is from the arithmetic mean (simple average). Investors describe standard deviation as the volatility of past mutual fund returns.

Helpful Hint: Investors holding several mutual funds cannot take the average standard deviation of their portfolio in order to calculate their portfolio’s standard deviation. In order to find the standard deviation of a multiple-asset portfolio, an investor would need to account for each fund’s correlation, as well as the standard deviation. In other words, volatility (standard deviation) of a portfolio is a function of how each fund in the portfolio moves in relation to each other fund in the portfolio.

Standard deviation of historical mutual fund performance is used by investors in an attempt to predict a range of returns for various mutual funds.

Also Known As: Many investors use the terms volatility and standard deviation interchangeably.
Examples:
If XYZ mutual fund has an average annual return (mean) of 8% and a standard deviation of 3%, then an investor may expect the return of the fund to be between 5% and 11% 68% of the time (one standard deviation from the mean -- 8% - 3% and 8% + 3%) and between 2% and 14% 95% of the time (two standard deviations from the mean -- 8% - 6% and 8% + 6%).
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