UNIVERSITY OF PETROLEUM AND ENERGY

STUDIES

U S E O F S TA N D A R D D E V I AT I O N F O R R I S K

MANAGEMENT IN POTENTIAL INVESTMENT

SUBMITTED BY -GROUP 9
MADHUR CHOPRA

AMIT YADAV

RAJDEEP BARUAH

PRIYANKA SWETA

AKSHAY RANA
Introduction

Uncertainty is something that has always posed a threat to managerial

decisions, when it comes to investments where a huge amount of money is
involved mangers cannot only rely on intuition for it may lead to huge
losses which they cannot afford. However statistics especially standard
deviation has however has helped in taking calculated risk, steps which can
be predicted using the available data enabling managers with a more quick
and reliable method of decision making. However before we start let us
take a look at what standard deviation really is.
Standard deviation
SD is used to check that how much a data is spread across the mean. It is
usually applicable on set of data representing the bell curves i.e. data is
approximately normal. High standard deviation means that data is spread
across mean far away from each other whereas low standard deviation
implies that the data is varying around means is commonly used to
understand whether a data point is Standard,expected,unusual or
unexpected

The formula for standard deviation is

= standard deviation

xi = each value of dataset

= the arithmetic mean of the data (This symbol will be indicated as mean
from now)

N = the total number of data points

(xi - mean)^2 = The sum of (xi - mean)^2 for all datapoints

Statistics in business

In business standard deviation is used to check market volatility and

thereforerisk.the more unpredictable the pattern and wider range means
higher risks.ramge bound stocks that dont deviate much from the mean
are considered to be great risk because they will not change their
behaviour. security that is having very large trading rangei.e spread
between high and low prices of a trading stock or security tends to spike or
reverse and cannot be predicted easily and have much greater risks .
When in stock markets the underlying assumption is that majority of the
activity of the price falls within range of normal distribution. In ND,
individual value falls within one SD of the mean. the stock market usually
follows the 68-95-99.7 rule i.e. a particular value with one SD of mean is
above or below mean 68% of time, values are within 2 SD 95 % time .For
example in a stock with mean price of Rs 45 and SD of Rs5 it can be
predicted that the closing price of the stock in the market can be calculated
between Rs 35 and Rs 55 95% of times.
The more risk a security poses larger is the variance and SD. While it can be
predicted that the price remains between the ranges of 2 SD 95 % of the
times, the range is still very large. As with anything else the greater the
numbers of outcomes are there, there is a greater possibility that one will
choose the wrong one.