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. Variance Swap

    A type of volatility swap where the payout is linear to variance ...
  3. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  4. Mean

    The simple mathematical average of a set of two or more numbers. ...
  5. Standard Deviation

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

    A type of risk measurement technique that uses historic returns ...
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. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center