Standard Deviation Use in the Business World

Standard Deviation Use in the Business World

Simona Nichols-Lucus, Desiree Price, Anthony Radford, and Kylie Tao

QRB/501

March 7, 2016

Dr. E. Woods

Standard Deviation Use in the Business World

Introduction

Standard deviation is defined as the dispersion of a set of data and its mean (Merriam-Webster, 2015). In math, the standard deviation is calculated by taking the square root of the variance, which is the average of the set of differences of data from the mean (MathIsFun, 2014). In a business setting, the standard deviation can be used to describe any performance variance from the norm. The standard deviation of an organization's performance should be addressed to improve processes to reduce the chances of future errors. The topic of “standard deviation use in the business world” can result in various studies and peer-reviewed articles. The following sections describe the different methods of standard deviation in the business world.

The Limitations of Standard Deviation as a Measure of Bond Portfolio Risk

The standard deviation of investments is used as a measurement of risks, which through standard deviation measures are expected. The purpose of this article is to question the ultimate usefulness of standard deviation in the investment world when measuring portfolio risks. Highlighting the limitations on the use of standard deviation of investment returns, which is the most "commonly used indicator of portfolio risks in the investment management business" (Wander & D'vari, 2003, para. 1). The standard deviation can be meaningful, however when solely relying on the standard deviation of returns of a risk measure (Wander & D'vari, 2003) may have positional problems due to standard deviation measurement of the expected risks, however not the potential risks which may produce misleading and inaccurate conclusions. The importance of this is the tremendous impact that an unexpected change will have, for standard deviation measures historically.

Estimating True Standard Deviation

Standard deviation is one of the most basic statistic measurements that students will learn. As with any statistics, standard deviations are based on relevant factors and complete randomness. This article questions the accuracy of the calculations and question if there is an exact formula in which the standard deviation can be calculated. The notion of accurate statistics originates from a classical test theory.

Trafimow’s (2014) article stated the following:

The theory commences with the definition of a “true score”- as the expectation across an infinite set of independent responses – and with an assumption that an observed score equals the true score plus error X=T+E. Thus, measures of constructs necessarily include random variance, as well as non-random variance (p235)

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