standard deviation

Even accounting for a step-change in inflation-adjusted stock market trends following the Great Depression in the 1930s, real U.S. equity prices are still elevated and more than 1 standard deviation above trend, Colmar notes.

For one, the cyclically adjusted price-to-earnings ratio, also known as the Shiller P/E ratio — a widely watched long-term valuation measure — rose above two standard deviations from its historical average in the summer of 2024.

This is appropriate, since this portfolio has a similar risk profile, with a standard deviation of annual returns over the past two decades that is similar to the average endowment.

That says the amount of a risky asset you want in your portfolio is equal to its expected excess return, divided by the square of the standard deviation of returns.

The magnitudes of the changes were calculated in terms of standard deviations, which are used in statistics to convey how tightly a group of data points is clustered together.