Question

Organizations frequently leverage standard deviation measurements to inform a variety of business decisions. For example, financial planners often evaluate the standard deviation of a potential investment to determine its associated risk.

Research the practical applications of standard deviation in your discipline.

Provide a relevant example from your discipline that demonstrates how standard deviation might be used to inform organizational processes or decisions. Be sure to include:

• an applied example of an organizational process or decision that could be influenced by calculating the standard deviation; and
• the data sources that would be used in the statistical measurement.

Explain how you would justify the use of evidence to inform a new process or business decision to the stakeholder in your organization.

Answer 1

Standard deviation is the most widely used measure of dispersion of a data relating to business profits, output, finance, investments etc. It is very useful in measuring the risk involved in business process and business decision making. It indicates the reliability of arithmetic mean of the data. If the standard deviation value is low in a data, then it indicates that all terms are very less deviating from their arithmetic mean there by arithmetic mean gets more support from the data and therefore it becomes more reliable and good representative of all terms in the data. On the other hand, the more value of standard deviation indicates all terms are more deviating from their arithmetic mean there by arithmetic mean gets less support from the data and therefore it becomes unreliable and not a good representative of all terms in the data. Standard deviation is best and ideal measure of dispersion of a series. We could obtain consistent and stable conclusion from the analysis of a data provided the data have very low standard deviation.

Standard deviation is a measure of risk in the expected profit of a business. If the standard deviation is low, it means that there is a low risk in achieving the expected profit. Standard deviation is very useful to assess the limits of most likely profit with some assured level of confidence if the profits are normally distributed. For example, the limits of expected normal profit with 95% confidence are (Mean profit + or -1.96xStandard deviation of profit). Also, the limits of expected normal profit with 99.73% confidence are (Mean profit + or -3xStandard deviation of profit).

For instance, to understand a financial data in financial markets, it is very important to have the knowledge of fluctuations involved in the data by measuring the standard deviation of the data. The high value of standard deviation indicates high fluctuation. Standard deviation reveals the volatility in the financial data. High standard deviation implies high volatility and low standard deviation implies that low volatility. Standard deviation is a volatility measure which shows the degree of uncertainty about the future price of a commodity, share or other financial product in financial markets. Thus standard deviation will be useful in understanding risk involved in financial decision making.

For example, the profits of a company for the last 10 months (in billions of dollars) are:

10, 15, 12, 13, 10, 17, 15, 20, 8

Then mean profit = (10+15+12+13+10+17+15+20+8)/10

= 120/10

= 12 billions dollars

Standard deviation of profit = Square root of [{(10²+15²+12²+13²+10²+17²+15²+20²+8²)/10}-mean²]

= Square root of [{(1716)/10} -12²]

= Square root of [171.6 - 144]

= Square root of [27.6]

=5.2535 billion dollars

Therefore, with 99.73% confidence, the average next month profit may lie in between the limits

(Mean profit -3xStandard deviation of profit, Mean profit + 3xStandard deviation of profit)

= (12-3x5.2535, 12+3x5.2535)

= (12-15.7605, 12+15.7605)

= (-3.7605, 27.7605)

The next month profit may range in between ( loss of 3.7605 billion dollars and profit of 27.7605 billion dollars)

It is an indication a high variation or fluctuation or volatility in the next month average profit. That is the next month expected profit has some high risk.

Therfore, a good decision of plan of action may be impletented to avoid or control losses.