Standard deviation and coefficient of variation - part 1

In this lesson

1. 0:00 Understanding risk and spread of outcomes
2. 0:51 Introducing standard deviation and variance
3. 2:34 Two methods for calculating standard deviation
4. 3:47 Method one: Using sample size approach
5. 5:39 From variance to standard deviation result
6. 7:21 Method two: Using probability and frequency
7. 9:24 Comparing both methods and interpreting results

About this lesson

You'll discover why knowing the expected return alone isn't enough; understanding how widely outcomes might vary is crucial to making confident financial decisions. The video walks you through two practical calculation methods. Method one uses the formula based on sample size, where you find the difference between each possible outcome and the mean return, square those differences, sum them, divide by the sample size, and take the square root to get your standard deviation. Method two presents the same data using probabilities and frequencies, following a slightly different formula structure but arriving at the identical result. Both approaches are equally valid—learning both gives you flexibility depending on how your exam question presents the information. You'll work through a concrete example using share returns, calculating the mean return of 5.8 percent and then determining a standard deviation of 8.35 percent. This tells you that while you expect a 5.8 percent return on average, actual returns will typically fall within 8.35 percentage points above or below that figure. Understanding this spread is what allows you to compare the risk profiles of different investments or projects objectively, moving beyond gut feeling to quantified analysis. This concept is directly relevant to FM, AFM, and performance management papers, where you'll regularly need to assess investment risk and help stakeholders understand the uncertainty attached to financial forecasts and decisions.

Duration: 10m