Question

Explain why we shouldn’t just simply take the average difference from the mean for our variability statistic?

Answer 1

Average difference from mean is also known as Average Deviation,or Mean Absolute Deviation The average deviation or mean absolute deviation is one type of measure of variability statistic. It is calculated similarly to standard deviation, but it uses absolute values instead of squares to circumvent the issue ofnegative differences between the data points and their mean. To calculate the average difference from mean, simply subtract the the absolute values of the differences. Use of Average and Standard Deviation Standard deviation is often used in creating strategies for investing and trading because it can help measure market volatility and predict performance trends. For example, an index fund should have a low average deviation when compared to its benchmark fund. That means it is closely tracking the benchmark, as it is supposed to do. More aggressive funds may have a highei The mean absolute deviation is used less frequently because the use of absolute values makes further calculations more complicated and unwieldy than using the simple standard deviation.