Western Governors University (WGU) BUS2040 D076 Finance Skills for Managers Practice Exam

Standard deviation is significant in finance primarily because it serves as a measure of the potential risk associated with an investment. When evaluating the volatility of an asset's returns, standard deviation calculates how much the returns deviate from the expected average return over a specific period. A higher standard deviation indicates greater variability in returns, suggesting that the investment is more volatile and carries a higher level of risk. Conversely, a lower standard deviation implies that the investment is more stable and less risky.

Understanding the concept of standard deviation helps investors assess the likelihood of achieving returns in line with their expectations and informs their decision-making processes regarding asset allocation and risk management. By quantifying the risk involved, investors can make more informed choices, balancing the potential for higher returns against their tolerance for risk.