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What is a Z score?
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A Z score is a statistical measure that shows how far a data point is from the average, expressed in terms of standard deviations. In finance, it is often used to assess risk or compare how unusual a value is relative to a normal distribution.
A Z score indicates how many standard deviations a value is above or below the average.
In financial analysis, Z scores can be used in different contexts, such as identifying outliers in market data or assessing the financial health of a company. One well known example is the Altman Z score, which is used to estimate the probability of a company going bankrupt based on financial ratios. A positive Z score means the value is above the average, while a negative Z score means it is below the average. The further the Z score is from zero, the more unusual the value is compared to the average.
Short example:
Suppose the average return of a group of stocks is 5 percent with a certain level of variation.
If a particular stock has a Z score of +2, it means its return is two standard deviations above the average.
This suggests the stock is performing significantly better than most others in the group.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.
