Standard Deviation
A measure of how far a set of returns typically sits from their average.
Formula
Standard Deviation = square root of the average of the squared deviations from the mean
Unit
%
In depth
Standard deviation is in the same units as the returns themselves, which is why it is preferred to variance for reporting. Its central limitation is that it treats an upside surprise as identical to a downside one, and investors do not — which is what the Sortino ratio addresses by measuring only downside deviation. It also assumes returns are well described by their mean and spread, while real return distributions have fat tails, so extreme events occur far more often than the normal distribution implies. Using it as the sole risk measure understates the frequency of the outcomes that matter most.
Worked example
Annual returns of 12%, -8%, 15%, 4% and -3% average 4%. The squared deviations are 64, 144, 121, 0 and 49, averaging 75.6, so the standard deviation is the square root of 75.6 = 8.7%.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Standard Deviation” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.