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An annual standard deviation is a type of measurement that focuses on the level of volatility or risk that is associated with an investment. The process calls for considering the annual rate of return that is generated by the investment, while also looking at the historical data regarding the changes in value throughout the period. If the deviation is found to be somewhat broad, then the annual standard deviation is considered high, indicating a greater level of volatility. When the standard deviation is somewhat narrow, then the asset in question is considered to have a lower level of risk.
Determining the annual standard deviation can be very helpful for investors who already own an asset or are thinking of purchasing an asset. For those who already own shares of a stock or some other investment, taking the time to identify the deviation can often make it easier to decide whether the rate of return is worth the level of risk, given the historical data on hand. Investors who are thinking of buying the investment can also use available data from one or more recent annual periods to get some idea of what type of returns were actually generated, and compare those returns to the risk taken on by other investors. Once the annual standard deviation is identified, it is easier to decide whether or not to buy shares, or even whether to hold on to any shares already included in the portfolio.
Since the annual standard deviation does have to do with assessing returns while also considering risk, it is important to note that just about every type of investment will have some measure of deviation. The goal is usually to make sure the range of that deviation is acceptable given the returns generated. Typically, investments that carry a low rate of risk will have a relatively narrow range of deviation. At the same time, investments that are known to carry a higher rate of volatility will likely exhibit a broader deviation, making them unsuitable for more conservative investors.
Using the annual standard deviation is only one of several assessment tools that investors can utilize when making investment decisions. Other methods can also be employed to measure volatility, including strategies designed to project changes to the value of the investments based on anticipated changes in the marketplace. For this reason, investors should not focus solely on the results of the annual standard deviation, but also make use of other methods in order to obtain a broader perception of the investment’s potential.