Variability

AAA

DEFINITION of 'Variability'

The extent to which data points in a statistical distribution or data set diverge from the average or mean value. Variability also refers to the extent to which these data points differ from each other. There are four commonly used measures of variability: range, mean, variance and standard deviation.


The risk perception of an asset class is directly proportional to the variability of its returns. As a result, the risk premium that investors demand to invest in assets, such as stocks and commodities, is higher than the risk premium for assets such as Treasury bills, which have much lower return variability.

INVESTOPEDIA EXPLAINS 'Variability'

Variability is used to standardize the returns obtained on an investment. One measure of reward-to-variability is the Sharpe ratio, which measures the excess return or risk premium per unit of risk for an asset. All else being equal, the asset with the higher Sharpe ratio delivers more return for the same amount of risk.







RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  3. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
  5. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  6. Risk

    The chance that an investment's actual return will be different ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  3. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  4. What types of assets produce negative portfolio variance?

    Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the ... Read Full Answer >>
  5. When is it better to use systematic over simple random sampling?

    Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >>
  6. What are some common financial sampling methods?

    There are two areas in finance where sampling is very important: hypothesis testing and auditing. The type of sampling methods ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  2. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  3. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  4. Options & Futures

    Calculating The Equity Risk Premium

    See the model in action with real data and evaluate whether its assumptions are valid.
  5. Active Trading Fundamentals

    How To Convert Value At Risk To Different Time Periods

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  6. Fundamental Analysis

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  7. Economics

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  8. Economics

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P 500 Trust

    Find out more about the SPDR S&P 500 ETF Trust, the characteristics of the exchange traded fund and the suitability of investing in the fund.
  10. Mutual Funds & ETFs

    ETF Analysis: Energy Select Sector SPDR

    Find out more about the Energy Select Sector SPDR Fund, the top holdings of this exchange-traded fund and the characteristics of the fund.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!