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Measures of Spread/Dispersion

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The Making of a Millionaire
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Credit: Moritz Wickendorf
Source: http://commons.wikimedia.org/wiki/File:Money_Cash.jpg
License: CC BY-NC 3.0

Have you ever heard someone talk about retiring as a millionaire? Are they just wishfully thinking? Not at all! If you invest your money properly, over time, even you could become a millionaire one day. But of course, there is risk involved with any investment. How do you know which stock or fund has the most potential to earn you money? Measures of spread can help you make the right choice.

Why It Matters

When you're thinking about investing in a particular fund, the fund prospectus will likely tell you how much your investment is expected to return. But that figure doesn't mean you'll actually earn that rate of return.

Credit: Laura Guerin
Source: CK-12 Foundation
License: CC BY-NC 3.0

Rates of return, in fact, can fluctuate widely. Standard deviation can assist you in determining how much fluctuation is involved with a particular fund. You can therefore leverage the standard deviation of a particular investment to estimate the amount of risk involved.

See for yourself: http://www.moneychimp.com/articles/volatility/standard_deviation.htm

Explore More

Check out the following video to see how an expected annual rate of return of 10% (sounds pretty good, right?) on an investment with a standard deviation of 12 could actually end up losing you money for the year.

http://www.youtube.com/watch?v=8a7VPIWIWrs

Image Attributions

  1. [1]^ Credit: Moritz Wickendorf; Source: http://commons.wikimedia.org/wiki/File:Money_Cash.jpg; License: CC BY-NC 3.0
  2. [2]^ Credit: Laura Guerin; Source: CK-12 Foundation; License: CC BY-NC 3.0

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