Help & FAQs

What is 'Standard Deviation?'

The simplest use is to compare funds. Additionally, you can estimate the range of returns that a fund can experience in any given year. This gives a useful estimate of how low returns can go.

To perform this simple estimate, you just need two numbers Morningstar provide: average return and Standard Deviation. You can estimate that, 95% of the time, the lowest annual return will be equal to the average return minus twice the Standard Deviation. Conversely, the maximum typical return, 95% of the time, will be equal to the average return plus twice the Standard Deviation.

Example: A money market fund had an annual average return of 6%, with a Standard Deviation of 1%. The typical maximum annual return you would expect is: 6 + 1 + 1 =  8%; the typical lowest return you would expect is 6 -1-1 = 4%. In other words, if the fund continues to behave as it has in the past, 95% of the time, its annual returns will be between 4% and 8%. 

Please note: Funds can be volatile, which will be reflected in the Standard Deviation.

Submitted on 20th Aug 2018

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