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Standard Deviation

What is Standard Deviation?

Standard deviation measures the dispersion around an average. For a mutual fund, it represents return variability. Investors can use standard deviation to predict a fund’s volatility. A higher standard deviation implies a wider predicted performance range and greater volatility.

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

For example, suppose a fund’s mean annual return is 10%, and it has a standard deviation of 2%. In 100 samples, its return should lie between nine and 11 percent 68 times, and eight to 12 percent roughly 95 times.

Standard deviation is more complex when calculated for a portfolio because it’s not a simple average. The figure must incorporate how each investment’s return correlates with each other.

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