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Standard Deviation

This statistical measurement of dispersion about an average, depicts how widely a mutual fund's returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that are most likely for a given fund. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility.

Standard deviation is most appropriate for measuring the risk a fund that is an investor's only holding. The figure cannot be combined for more than one fund because the standard deviation for a portfolio of multiple funds is a function of not only the individual standard deviations, but also of the degree of correlation among the funds' returns.

If a fund's returns follow a normal distribution, then approximately 68% of the time they will fall within one standard deviation of the mean return for the fund, and 95% of the time within two standard deviations.

For example, for a fund with a mean annual return of 10% and a standard deviation of 2%, you would expect the return to be between 8% and 12% about 68%of the time, and between 6% and 14% about 95% of the time.

At Morningstar, the standard deviation is computed using the trailing monthly total returns for the appropriate time period. All of the monthly standard deviations are then annualized. Standard deviation is also a component in the Sharpe Ratio, which assesses risk-adjusted performance.

For example, Fund A has a standard deviation of 23.56%. This means that approximately 68% of the time, Fund A will be within 23.56% of its mean of 25.33.

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