Chapter 03 · Section 3.1

Standard deviation

We have seen that it is important to know how wide or how thin a probability distribution is. This "dispersion" can be quantified with a number called the standard deviation.

This standard deviation provides only limited information: it is only a measure for the expected mean deviation of the value at expiration from the current value. It does not provide any information about the shape of the distribution (symmetric or not, linear or not,...).

The use of standard deviations, however, enables us to make valuable comparisons between distributions of the same shape.