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Standard Deviation

Standard deviation is one of those phrases that just sounds too complicated. When I was studying investments to get my Securities License and my Certified Financial Planner designation years ago, I finally realized why I had chosen theatre voice and not mathematics as a minor in college. After many years, much graying of the hairs, and work with countless spreadsheets, the concept of standard deviation is far less daunting to me, and arguably interesting. It helps to have a clear understanding of it, so let me try my hand at simplifying this mathematical term.

First, let's define standard deviation by example, not by the dictionary. Then we can see how its use can help us assess risk. Let's say that you wanted to look at the batting averages of the top 100 major league baseball players. You would want to map out the batting average for the 2003 season and then plot the batting averages on a graph so that it can start to tell a story. Let's say that the lowest of the top 100 was .267 and the highest was .395. When you look at the end points on a graph, as in Figure 12-2, you notice that there are a few batters in the top 20 percent and a few in the bottom 20 percent, with 60 percent somewhere in the middle.


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