Standard Deviation Question

Discussion in 'Educational Resources' started by Dustin, Jun 8, 2002.

  1. Dustin


    I just realized I may have messed up on my pairs spreadsheet. I calculated 1 st dev with excel, and just multiplied it by 2 to get 2 st dev's. Is that how to get the 2nd st dev?

  2. white17


    Dustin; I don't know whether this will help you or not but FWIW the rule of thumb is;

    1 std. dev covers 68.3 % of all possible outcomes
    2 std devs. cover 95.4% of all possible outcomes
    3 std devs cover 99.7 % of all possible outcomes.

    perhaps you can figure a way to use these relationships to get where you want to go.
  3. tom_p


  4. first you calculate what a standard deviation is for your sample. One standard deviation is 1x, 2 standard deviations is 2x. The area under the curve will be significantly different though.
  5. Hopefully a math/stats guy can shed some light on this question.
    Does this standard deviation calculation apply to the stock prices?
    (i think there is an assumption that there is a 'bell-shaped' normal distribution)...tks
  6. PKJR


    yes it does..
  7. Rigel


    The standard deviation is a component of the Bell curve which is used to determine probabilities. It can be used to analyze any data.
  8. dlincke


    It's not a component, it describes the Bell curve. Of course the results of operations assuming a normal distribution and assumptions as to the probability significance of certain standard deviation multiples will only hold if the data sample in question in fact conforms to a normal distribution.

    The problem with financial markets in this respect is that they may fit a normal distribution pretty well for much of the time, but usually when it's most critical (like in a crash) the assumption will fail due to kurtosis and fat tails.
  9. OK, so the market does exhibit a normal distribution with the exception of major market crashes? So one can expect most of the price action to be contained within 2 std deviations the majority of the time.
  10. does that mean it's 'normal' except when a 3+ stdev event occurs? Wouldn't it still be 'normal?'
    #10     Jun 9, 2002