Standard deviation
The square root of variance, and so in the same units as the data. The usual measure of dispersion and of investment risk, though it counts pleasant surprises as risk too.
Where you will meet it
Standard deviation appears in 31 learning outcomes on the CFA syllabus. A few of them:
- Work out measures of dispersion and explain what they show
“Variance is the mean squared deviation; standard deviation is its square root and shares the units of the data, which is why it is what gets reported.”
- Work out the expected return on a portfolio of two assets
“Portfolio variance depends on the two variances, the weights, and the covariance between the assets, so portfolio standard deviation is generally less than the weighted average of the individual standard deviations.”
- Set out risk measures suited to return distributions that are not normal
“Standard deviation weights upside and downside equally and therefore misdescribes such a distribution, and the Sharpe ratio inherits the problem.”
- Explain momentum indicators and how they are used in valuation
“Unexpected earnings, or earnings surprise, is reported EPS less expected EPS, and dividing it by the standard deviation of analysts' forecasts gives a scaled earnings surprise.”
See also
Practise it
Practise standard deviation until it is automatic: questions that explain every wrong option.
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