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Updated 2mo ago.
Updated 2mo ago.
Standard deviation measures how spread out an investment's returns are around its average. The higher the standard deviation, the more returns vary from one period to the next, and therefore the more volatile the investment. It's the most common risk measure in finance.
A bond ETF like ZAG.TO might have an annual standard deviation of 5%, while a tech equity ETF like XQQ.TO could show a standard deviation of 20%. This means XQQ.TO's returns fluctuate much more — both up and down. The Sharpe ratio uses standard deviation precisely to assess whether the extra volatility is compensated by better returns.
Standard deviation helps you understand the "price" of returns: an ETF with high returns but high standard deviation will take you on a roller coaster. For beginners, knowing your portfolio's standard deviation helps choose an asset allocation you can psychologically tolerate during downturns.