Standard deviation describes the dispersion of a data series from its mean. The variation between each data point relative to the mean is ascertained and averaged and then the square root is taken. If the data points are further from the mean, there is higher deviation within the data set.
In finance, standard deviation is a statistical measurement; when applied to the annual rate of return of an investment, it sheds light on the historical volatility of that investment. If the data points have a high deviation, then their future path is deemed less certain. In this way, an investment’s risk is determined. The higher a security’s standard deviation, the greater the variance between each price and the mean, indicating a larger expected price range.