Contents
Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Hall of Fame
Credit Report
Forex
401K
ETFs
Futures
Inflation
IPOs
Mergers
Online Scams
Calculators
Financial Terms
Scientific Terms
Military Terms
Financial Charts
Unemployment
Fuel Mileage
Sports Finance
Energy Efficiency
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Francias
Portuguese
Disclaimer

Standard Deviation
We can measure risk by using standard
deviation. Higher standard deviation means higher risk.
Here is the example from the probability
distribution page
Probability Distribution  In
Business
Economic Outcome 
Probability 
Return on Investment 
Great 
20% 
25% 
Good 
40% 
15% 
SoSo 
30% 
5% 
Really Bad 
10% 
0% 
(Sorry, I don't know how to write sigma and the square
root sign in html, so I can't show you the formula for
Standard Deviation, but you can still plug in your
numbers to the chart below)
Economic Outcome 
Return on Investment 
minus 
ERR  the Expected Rate of
Return 
equals 
answer 
squared 
times 
Probability of the
Economic Outcome 
equals 
Answer 
Great 
25% 
 
12.5% 
= 
12.5 
156.25 
X 
20% 
= 
31.25 
Good 
15% 
 
12.5% 
= 
2.5 
6.25 
X 
40% 
= 
2.5 
SoSo 
5% 
 
12.5% 
= 
7.5 
56.25 
X 
30% 
= 
16.875 
Really Bad 
0% 
 
12.5% 
= 
12.5 
156.25 
X 
10% 
= 
15.625 








Total 
= 
66.25 
 So the total is 66.25. This is
called the Variance.
 The square root of 66.25 = 8.139
 So the Standard Deviation is 8.139
About the author

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

Copyright © 1997  2009 by
Mark McCracken
, All Rights Reserved 