Standard Deviation
Standard deviation is a statistical measure of how widely an investment's returns are spread around their average, used as a common gauge of volatility and risk.
A low standard deviation means returns tend to cluster close to the average; a high one means returns vary widely from year to year or day to day. In finance, it is usually calculated from monthly or daily returns and annualized.
If returns roughly follow a bell-shaped normal distribution, about 68% of outcomes fall within one standard deviation of the average and about 95% within two. Example: a fund with an average annual return of 8% and a standard deviation of 15% would be expected to return between -7% and +23% in about two out of three years.
Standard deviation is the basis of many risk measures, including the Sharpe ratio and Bollinger Bands, and fund fact sheets often list it.
Real market returns are not perfectly normal, however. Extreme moves such as crashes happen more often than the bell curve predicts, a property known as fat tails. Standard deviation also treats upside and downside swings the same, which is why investors often look at drawdowns as well.