Glossary · from the DESK dictionary
Standard Deviation
A statistical measure of how returns are dispersed around their average — the most common volatility metric.
In plain words
Shows how much actual outcomes deviate, on average, from the expected value.
In more detail
Standard deviation measures the average dispersion of values around their mean and is finance's most widespread definition of risk. Its prevalence stems from computability, not conceptual superiority: it treats upward and downward swings alike although only one direction troubles anyone. It also describes a symmetric distribution — for the skewed, fat-tailed distributions of real returns it understates actual loss risk.
Formula
σ = √(Σ(xᵢ - μ)² / n)
The square root of the average squared deviation from the mean μ.
Example
Two strategies have a 15 percent standard deviation. One fluctuates evenly, the other delivers eleven calm months and one at minus 28 percent. The metric is identical, the risk entirely different.
What it means for traders
A fundamental statistical metric underlying virtually every risk and options-pricing model.
Common pitfalls
Treats upside and downside swings the same, even though investors value them differently in practice.
Related terms
Average True Range (ATR) · Bollinger Band · Coefficient of Variation (CV) · Confidence Interval · Dispersion · Empirical Rule (68-95-99.7 Rule) · GARCH Model · Historical Volatility (HV) · Normal Distribution · Probability Distribution · Sharpe Ratio
From the DESK dictionary. For information only, not investment advice.
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DESK is a research tool and not investment advice. Page generated: 2026-10-12.