Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.
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What is the difference between Beta and Standard Deviation?
• Beta and standard deviation are measures of volatility used in the analysis of risk in investment portfolios.
• Beta measures a security’s or portfolio’s performance (asset’s risk and return) in relation to the movements in the market.
• A beta value of 1 show that the security is performing in line with the market’s performance; a beta of less than 1 show that security’s performance is less volatile than the market, and a beta of more than 1 show that a security’s performance is more volatile than the benchmark.
• The standard deviation of an investment measures the volatility of returns, and so the higher the standard deviation, the higher volatility and risk involved in the investment.