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Volatility (standard deviation)
How to measure how much an investment swings.
Volatility = √(average of (return − mean return)2)Example: four years returning +10%, −5%, +15%, 0%
Mean(10 − 5 + 15 + 0) ÷ 4 = 5%
Differences5, −10, 10, −5
Squared25, 100, 100, 25
Average250 ÷ 4 = 62.5
Volatility√62.5 ≈ 7.9%
Two investments with the same average can differ a lot in volatility. The more volatile one needs more patience and a longer horizon.
For simplicity we divided by the number of years; statistics sometimes divides by (count − 1).
All content on this site is for educational purposes only and is not investment advice or a recommendation. Past performance does not guarantee future results. Consult a licensed adviser before making any investment decision.