Students Q and A

How Z-Score is different from Standard Deviation?

How Z-Score is different from Standard Deviation?

by Kaniz Fatema Towa -
Number of replies: 0

Z-Score

The Z-score, or standard score, is the number of standard deviations a given data point lies above or below the mean. The mean is the average of all values in a group, added together, and then divided by the total number of items in the group.To calculate the Z-score, subtract the mean from each of the individual data points and divide the result by the standard deviation. Results of zero show the point and the mean equal. A result of one indicates the point is one standard deviation above the mean and when data points are below the mean, the Z-score is negative
Standard Deviation

Standard deviation is essentially a reflection of the amount of variability within a given data set. It shows the extent to which the individual data points in a data set vary from the mean. In investing, a large standard deviation means that more of your data points deviate from the norm, so, the investment will either outperform or underperform similar securities. A small standard deviation means that more of your data points are clustered near the norm and returns will be closer to the expected results.

Investors expect a benchmark index fund to have a low standard deviation. However, with growth funds, the deviation should be higher as the management will make aggressive moves to capture returns. As with other investments, higher returns equate to higher investment risks.