What does one standard deviation mean?
- Thread starter snow
- Start date
Snow
Standard Deviation "SD" is one of a number of measures of the spread or variation of a population of numbers.
Standard Deviation is normally used when referring to a Distribution of the numbers based on a Normal or "Bell" Curve. http://en.wikipedia.org/wiki/Standard_deviation
In simple terms a mathematical curve can be used to estimate and model the distribution of the population around its mean (average). In nature and life generally a Normal Distribution exists for many many populations of numbers, This means that most of the numbers will be near the mean, with fewer numbers as you get further away from the mean, hence the bell shaped curve.
With a normal distribution as it is mathematically defined there are standard rules for the distributions shape, but simply
99.7% of the population falls with +/- 3 SD's
95.5% of the population falls with +/- 2 SD's
68.3% of the population falls with +/- 1 SD's
In your case above you ask "What would be the percentage loss to the invester if each stock's price falls by ONE standard deviation?"
Firm A
Mean $531.94
1 SD = 60.97
So if the share price falls by 1 SD it will fall by 60.97/531.94 or 11.46%
The 1 SD refers to the fact that 68.3% of the population of the source numbers would be within the range of $531.94 +/-$60.97, etc for the other SD ranges
You can read more about how to use statistics in Excel in:
http://chandoo.org/wp/2010/05/06/data-tables-monte-carlo-simulations-in-excel-a-comprehensive-guide/
or
http://chandoo.org/wp/2011/01/24/trendlines-and-forecasting-in-excel/
http://chandoo.org/wp/2011/01/26/trendlines-and-forecasting-in-excel-part-2/
&
http://chandoo.org/wp/2011/01/27/trendlines-and-forecasting-in-excel-part-3/
Standard Deviation "SD" is one of a number of measures of the spread or variation of a population of numbers.
Standard Deviation is normally used when referring to a Distribution of the numbers based on a Normal or "Bell" Curve. http://en.wikipedia.org/wiki/Standard_deviation
In simple terms a mathematical curve can be used to estimate and model the distribution of the population around its mean (average). In nature and life generally a Normal Distribution exists for many many populations of numbers, This means that most of the numbers will be near the mean, with fewer numbers as you get further away from the mean, hence the bell shaped curve.
With a normal distribution as it is mathematically defined there are standard rules for the distributions shape, but simply
99.7% of the population falls with +/- 3 SD's
95.5% of the population falls with +/- 2 SD's
68.3% of the population falls with +/- 1 SD's
In your case above you ask "What would be the percentage loss to the invester if each stock's price falls by ONE standard deviation?"
Firm A
Mean $531.94
1 SD = 60.97
So if the share price falls by 1 SD it will fall by 60.97/531.94 or 11.46%
The 1 SD refers to the fact that 68.3% of the population of the source numbers would be within the range of $531.94 +/-$60.97, etc for the other SD ranges
You can read more about how to use statistics in Excel in:
http://chandoo.org/wp/2010/05/06/data-tables-monte-carlo-simulations-in-excel-a-comprehensive-guide/
or
http://chandoo.org/wp/2011/01/24/trendlines-and-forecasting-in-excel/
http://chandoo.org/wp/2011/01/26/trendlines-and-forecasting-in-excel-part-2/
&
http://chandoo.org/wp/2011/01/27/trendlines-and-forecasting-in-excel-part-3/