In investing, standard deviation quantifies how much returns vary from their average. Higher standard deviation implies wider swings โ bigger gains and bigger losses.
It's the foundation of many risk metrics including Sharpe ratio and Value at Risk. Assumes a roughly normal distribution, which real market returns violate at the extremes (fat tails).
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Open Decision Lab โFrequently asked questions
Is one standard deviation always ~68%?
Under a normal distribution, yes โ but market returns have more extreme events than a normal distribution predicts.