✔️ Information reviewed and updated in December 2023 by Eduardo López
Although many of us do not like the idea of having to use statistics and mathematics, through them we can perform calculations of great value when making decisions. A perfect example is found in the standard or standard deviation, one of the most used statistical indicators.
Here we will tell you everything you need to know and how you should apply it to the financial world. Best of all, we will make it very simple.
➡The definition of standard deviation✨
We can define the standard deviation as an indicator that allows you to see how dispersed a certain variable is. According to mathematical precepts, the standard or typical deviation is always equal to or greater than zero, there is no deviation that is less.
In the world of statistics, the standard deviation allows us to know how volatile and dispersed the study was carried out. Thus, we can ensure the confidence of the calculations and the sample, as well as reveal whether it is reliable and useful for the purposes of the study in question.
➡What is the standard deviation for? ✨
Although it could be a bit complex to understand, the standard deviation is very important, as it allows us to understand the dispersion of the data. And it is that the very dispersed data can be useless, for example, for a study or very disparate affecting the conclusions.
Another use of the standard deviation is to use it as a way to create a reference value which will allow us to estimate how much the analysis will vary. It is worth remembering that the more dispersed the data, the larger the standard deviation and the more complex it is to draw accurate conclusions.
➡How is it obtained? ✨
The shortest way to calculate the standard deviation is to do it as if it were a mean, that is, taking the values of the deviations and thus making a calculation of the mean, which would be the standard deviation.
Another option is to use mathematical formulas. The first is by squaring the deviation data to divide it by the total deviation to obtain its square root. Although the simplest way is the first, take all the deviation values, add them and divide them by the total data to obtain a mean.
➡How can we use the standard deviation? ✨
Although the standard deviation is not widely used in the finance segment, it is very useful when doing statistical calculations. This is because the standard deviation is a very useful indicator to know how reliable the central values are.
For example, if you have very dispersed data in your study then the central data is likely to be unreliable, on the other hand, if they are more homogeneous the data will be more solid. Thus, you will know if that study was the appropriate one and if the data obtained will be useful to you.