Standard Deviation
How widely returns disperse around their average.
What is Standard Deviation?
The standard measure of total volatility, capturing both systematic and unsystematic risk. Higher standard deviation means a wider range of plausible outcomes. It treats upside and downside deviation identically, which is its main limitation.
Standard Deviation: a worked example
A 10% average return with 15% standard deviation puts roughly two-thirds of annual outcomes between -5% and +25%.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.
Maximum Drawdown
The largest peak-to-trough decline over a period.