### << Back

### Hi

### Show Ans

### i

In pair trading, **standard deviation** is a crucial statistical measure. It **quantifies the volatility** of the ratio between two co-integrated assets. A **higher standard deviation** suggests greater price fluctuations in the ratio, indicating a **higher likelihood of the ratio reverting to its historical mean**. This reversion forms the basis of pair trading strategies, where traders capitalize on temporary deviations from the mean, expecting the spread to converge. Therefore, understanding standard deviation is essential for assessing the potential profitability and risk associated with a pair trading opportunity.

## How does the concept of standard deviation relate to pair trading based on the ratio?

"Standard deviation measures the average value of the ratio, providing a baseline for comparison."

"Standard deviation quantifies the volatility of the ratio, indicating the likelihood of it reverting to the mean."

"Standard deviation determines the optimal time frame for holding a pair trade, maximizing profitability."

"Standard deviation identifies the correlation between the two stocks in the pair, highlighting their interconnectedness."

↓