Variance

AAA

DEFINITION of 'Variance'

A measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean. Variance is calculated by taking the differences between each number in the set and the mean, squaring the differences (to make them positive) and dividing the sum of the squares by the number of values in the set. 

INVESTOPEDIA EXPLAINS 'Variance'

Variance is used in statistics for probability distribution. Since variance measures the variability (volatility) from an average or mean, and volatility is a measure of risk, the variance statistic can help determine the risk an investor might take on when purchasing a specific security. 

A variance value of zero indicates that all values within a set of numbers are identical; all variances that are non-zero will be positive numbers. A large variance indicates that numbers in the set are far from the mean and each other, while a small variance indicates the opposite. 

Statisticians use variance to see how individual numbers relate to each other within a data set, rather than using broader mathematical techniques such as arranging numbers into quartiles. A drawback to variance is that it gives added weight to numbers far from the mean (outliers), since squaring these numbers can skew interpretations of the data.

 

RELATED TERMS
  1. Yield Variance

    The difference between actual output and standard output of a ...
  2. Standard Deviation

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

    A type of risk measurement technique that uses historic returns ...
  4. Heteroskedasticity

    In statistics, when the standard deviations of a variable, monitored ...
  5. Semivariance

    A measure of the dispersion of all observations that fall below ...
  6. Covariance

    A measure of the degree to which returns on two risky assets ...
Related Articles
  1. Using Historical Volatility To Gauge ...
    Markets

    Using Historical Volatility To Gauge ...

  2. Does Your Investment Manager Measure ...
    Personal Finance

    Does Your Investment Manager Measure ...

  3. The Uses And Limits Of Volatility
    Markets

    The Uses And Limits Of Volatility

  4. Breaking Down The Geometric Mean
    Investing Basics

    Breaking Down The Geometric Mean

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center