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From Table 1, x = the monthly returns for August 2011 till July 2012, n = 11 (12 months -1) and Ma = 1.00% (average of all 12 months' returns).
So, what does Kenanga Growth Fund's annualised standard deviation of 10.53% mean? How do you interpret this figure? Statistically speaking, according to the empirical rule for a normal distribution, 68.27% of the population (in this case, the population used is monthly returns) would fall within 1 standard deviation (or in Kenanga Growth Fund's case, 3.04%) of the mean (i.e. 1.00%). In other words, Kenanga Growth Fund's monthly return is at between -2.04% and 4.04% (1.00% + 3.04%) for 68.27% of the time.
The more volatile the fund is, the wider the range of fluctuation in the unit trusts' price and return.
Looking at the annualised standard deviation of 10.53%, this would mean that for 68.27% of the time, the Kenanga Growth Fund returned within a range of 1.52% to 22.58% per annum (12.05% + 10.53%). This is based on the monthly returns for the 1-year period from end- July 2011 to end-July 2012. Using daily returns or lengthening the test period would however give a different volatility figure.
One point to note is that the period taken into calculation for the above example is just one year. As with any statistical test, the larger the population, the more data sampled and hence generally, the more reliable the results. For unit trusts, three years' worth of data is usually used in order to take into account a fund's volatility over a longer-term period but for brevity sake, our example only uses 1-year worth of data.
Apart from knowing the range of returns that a particular unit trust can give for a certain period, the annualised standard deviation of a unit trust is even more useful if it is used to compare against its peers' annualised standard deviation. This is particularly so when an investor wishes to only invest in one fund but is deciding between two...