Chartered Market Technician (CMT) Practice Exam

The correct approach for calculating standard deviation involves taking the square root of the variance. Standard deviation is a measure that quantifies the amount of variation or dispersion in a set of values. To compute standard deviation, one first calculates the variance, which is the average of the squared differences from the mean. Since the variance is expressed in squared units, taking the square root of the variance brings the measure back to the original units of the data, making standard deviation a more interpretable statistic.

For instance, if you have a set of stock returns, the variance helps capture how far the returns spread out from the average return, but its squared nature can obscure this spread's real meaning. Taking the square root provides a value that can be more easily compared to the original data points.

Other operations mentioned do not reflect the correct methodology for calculating standard deviation. For example, squaring the variance would yield a result that is even further removed from the original data's context. Adding all returns together doesn't quantify dispersion or variability, and dividing variance by the mean doesn't relate to standard deviation calculation but rather to different statistical interpretations.