LOGO

Statistics For
Finance
 Standard Deviation

A measure of the dispersion of a set of data from

its mean. The more spread apart the data, the higher
the deviation.
Standard deviation is calculated as the square root
of variance.
In finance, standard deviation is applied to the annual
rate of return of an investment to measure the
investment's volatility.

Standard deviation is also known as historical volatility

and is used by investors as a gauge for the amount of
expected volatility.
 Accountants can make important inferences from
past data with this measure, is given by
 Standard Error
•The standard error, or standard error of the
mean, of multiple samples is the standard
deviation of the sample means, and thus gives a
measure of their spread
 A small standard error is thus a Good Thing.

•When there are fewer samples, or even one, then

the standard error, can be estimated as the standard
deviation of the sample (a set of measures of x),
divided by the square root of the sample size (n):

•SE = stdev(xi) / sqrt(n)

Normal Distribution
The graph of the normal distribution depends on two factors –
the mean and the standard deviation.

The mean of the distribution determines the location of the center

of the graph.

And the standard deviation determines the height and width of

the graph.

When the standard deviation is large, the curve is short and

wide.

When the standard deviation is small, the curve is tall and

narrow
YOUR SIT HERE
•every normal curve (regardless of its mean or standard deviation)
conforms to the following "rule".
•About 68% of the area under the curve falls within 1 standard
deviation of the mean.
•About 95% of the area under the curve falls within 2 standard
deviations of the mean.
•About 99.7% of the area under the curve falls within 3 standard
deviations of the mean.
•Collectively, these points are known as the empirical rule or
the 68-95-99.7 rule. Clearly, given a normal distribution, most
outcomes will be within 3 standard deviations of the mean.
 Covariance
A statistical measure of the extent to which two variables move
together.

Covariance is used by financial analysts to determine the degree

to which return on two securities is related.

In general, a high covariance indicates similar movements and

lack of diversification

A positive covariance means that asset returns move together;

a negative covariance means the returns move inversely.
One method of calculating covariance is by looking at return
surprises (deviations from expected return) in each scenario.

Another method is to multiply the correlation between the two

variables by the standard deviation of each variable.

So here the relation between correlation and covariance is

YOUR SITE HERE

YOUR SITE HERE