Chartered Market Technician (CMT) Practice Exam 2026 – Your All-in-One Guide to Exam Success!

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion in a set of values. In the context of return distributions, it specifically indicates how much individual returns deviate from the average return. A higher standard deviation means that returns are more spread out, reflecting greater volatility in the asset's returns, while a lower standard deviation suggests that returns are clustered closer to the average, indicating less volatility.

This characteristic of standard deviation makes it a critical tool for assessing the risk associated with an investment. Investors often look at standard deviation as a way to gauge the potential for price fluctuation; thus, it serves as a measure of risk. The understanding of this principle enables traders and investors to make informed decisions based on how much they can expect the returns to vary over a specified period.