Series 66: Standard Deviation

Taken from our Series 66 Online Guide

Standard Deviation

Investors use standard deviation (SD) to measure the variability of a security’s returns. For example, if a stock’s price fluctuates greatly over time, its returns will show a high standard deviation, meaning greater risk to the investor. Securities with high standard deviations tend to have higher expected returns (and yields), because the market requires compensation for greater risk.

A security with a higher standard deviation has a greater probability of high or low returns than a security with a lower standard deviation. Thus, a high standard deviation means more risk for the investor.

In the example below, even though Securities A and B have the same average return of 4.4%, Security A has a higher standard deviation than Security B. In fact, an investor can expect to see the returns on Security A varying on average by 10.8%, but the returns of Security B should vary less than 1%. This makes Security A a much riskier investment than Security B.

Year 1

Year 2

Year 3

Year 4

Year 5



Security A








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