Lesson 3 of 7 · 14 min

Range, mean absolute deviation, variance and standard deviation

Dispersion measures how widely returns scatter around their mean; if the mean is the reward, dispersion is the risk.

In short

Range = maximum − minimum: simple, but it uses only two observations and is driven by outliers.
Mean absolute deviation (MAD) averages the absolute distances from the mean, dividing by n.
Sample variance averages squared deviations but divides by n − 1, the degrees of freedom left after estimating the mean.
Standard deviation is the square root of the variance and is in the data's own units, so it is the usual risk figure.
These are measures of absolute dispersion; relative dispersion (the coefficient of variation) follows in the next lesson.

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