Variance is 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.
Using a data set chart, we can observe what the linear relationship of the various data points, or numbers, is. We do this by drawing a regression line, which attempts to minimize the distance of any individual data point from the line itself. In the chart below, the data points are the blue dots, the orange line is the regression line, and the red arrows are the distance from the observed data and the regression line. (Want to learn more about excel? Check out Investopedia Academy'sÂ excel course online!) Â
When we calculate a variance, we are asking, "Given the relationship of all these data points, how much distance do we expect on theÂ nextÂ data point? Â This "distance" is called the error term, and it's what variance is measuring. Â
By itself, variance is not often useful because it does not have a unit, which makes it hard to measure and compare. Â However, the square root of variance is the standard deviation, and that is both practical as a measurement. Â
Calculating Variance in Excel
Calculating variance in Excel is easy if you have the data set already entered into the software. In the example below, we will calculate the variance of the last 20 days of daily returns in the highly popular exchangetraded fund (ETF) named SPY, which invests in the S&P 500.
 The formula is =VAR.S(select data)
The reason you want to use VAR.S and not VAR.P (which is another formula offered) is that often you don't have the entire population of data to measure.Â For example, if we had all returns in history of the SPY ETF in our table, we could use the population measurement VAR.P, but since we are only measuring the last 20 days to illustrate the concept, we will use VAR.S. Â
Â
As you can see, the calculated variance value of .000018674 tells us little about the data set, by itself.Â If we went on to square root that value to get the standard deviation of returns, that would be more useful. Â

What is the difference between standard deviation and variance?
Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >> 
Is variance good or bad for stock investors?
Learn how high variance stocks are good for some investors and how diversified portfolios can reduce variance without compromising ... Read Answer >> 
What is price variance in cost accounting?
Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ... Read Answer >> 
What types of assets lower portfolio variance?
Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >> 
How is standard deviation used to determine risk?
Understand the basics of calculation and interpretation of standard deviation, and how it is used to measure risk in the ... Read Answer >>

Trading
Exploring the Exponentially Weighted Moving Average
Learn how to calculate a metric that improves on simple variance. 
Investing
Computing Historical Volatility in Excel
We examine how annualized historical volatility is computed from daily log returns, variance and standard deviation. 
Trading
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". 
Investing
An Introduction to Value at Risk (VAR)
Volatility is not the only way to measure risk. Learn about the "new science of risk management". 
Trading
Improve Your Investing With Excel
Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it. 
Trading
The Linear Regression Of Time and Price
This investment strategy can help investors be successful by identifying price trends while eliminating human bias. 
Personal Finance
Backtesting ValueatRisk (VaR): The Basics
Learn how to test your VaR model for accuracy. 
Trading
Trading With Gaussian Models Of Statistics
The entire study of statistics originated from Gauss and allowed us to understand markets, prices and probabilities, among other applications.

Budget Variance
A periodic measure used by governments, corporations or individuals ... 
Standard Deviation
A measure of the dispersion of a set of data from its mean, calculated ... 
MeanVariance Analysis
The process of weighing risk against expected return. Mean variance ... 
Sales Price Variance
The difference between the amount of money a business expects ... 
Efficiency Variance
Efficiency variance is the difference between the theoretical ... 
Analysis Of Variance  ANOVA
Analysis of variance (ANOVA) is a statistical analysis tool that ...