New to stock investing hence reading up a few tutorial to better understand stocks/stock market. Came across a chapter that says, "Understanding risk with the stock market" and it says that traders and analysts use a number of metrics to assess the volatility and relative risk of potential investments (sharpe ratio, sortino ratio, beta, alpha, rsquared), but the most common metric is standard deviation.
I somewhat get what standard deviation is,
- Standard deviation helps determine market volatility or the spread of asset prices from their average price.
- When prices move wildly, standard deviation is high, meaning an investment will be risky.
- Low standard deviation means prices are calm, so investments come with low risk.
There is an example too which says, in a stock with a mean price of $45 and a standard deviation of $5, it can be assumed with 95% certainty the next closing price remains between $35 and $55. However, price plummets or spikes outside of this range 5% of the time. A stock with high volatility generally has a high standard deviation, while the deviation of a stable blue-chip stock is usually fairly low.
What I did not understand is how did the above example calculate the range of the stock price to be in between $35 to $55?
How do you calculate the fluctuation price range if you know the stock price and the standard deviation value?