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's excel course online!)
When we calculate a variance, we are asking, "Given the relationship of all these data points, how much distance do we expect on the next data point? This "distance" is called the error term, and it's what variance is measuring.
By itself, variance is not often useful because it does not have a unit, which makes it hard to measure and compare. However, the square root of variance is the standard deviation, and that is both practical as a measurement.
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. 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.
As you can see, the calculated variance value of .000018674 tells us little about the data set, by itself. If we went on to square root that value to get the standard deviation of returns, that would be more useful.

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 >> 
What is the difference between standard deviation and average deviation?
Understand the basics of standard deviation and average deviation, including how each is calculated and why standard deviation ... Read Answer >> 
How can I create a linear regression in Excel?
Learn the steps involved in creating a linear regression chart in Microsoft Excel. A linear regression is a data plot that ... Read Answer >> 
According to the CAPM, the expected return on a stock, that is part of a portfolio, ...
A. the covariance between the stock and the market. B. the variance of the market. C. the market risk premium. D. ... Read Answer >> 
How do you calculate Rsquared in Excel?
Calculate Rsquared in Microsoft Excel by creating two data ranges to correlate. Use the correlation formula to correlate ... Read Answer >>

Trading
Exploring the Exponentially Weighted Moving Average
Learn how to calculate a metric that improves on simple variance. 
Investing
Value at Risk (VaR)
Value at risk, often referred to as VaR, measures the amount of potential loss that could happen in an investment or a portfolio of investments over a given time period. 
Investing
Guide To Excel For Finance
Formulas, functions and features you need to know when using Excel for financial analysis. 
Trading
The Linear Regression of Time and Price
This investment strategy can help investors be successful by identifying price trends while eliminating human bias. 
Investing
Understanding The Sharpe Ratio
The Sharpe ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. 
Investing
Regression Basics For Business Analysis
This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how. 
Personal Finance
Backtesting ValueatRisk (VaR): The Basics
Learn how to test your VaR model for accuracy. 
Investing
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in modern portfolio theory to quantify investment risk. 
Investing
Calculating volatility: A simplified approach
Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it: the historical method. 
Small Business
How to Calculate NPV Using XNPV Function in Excel
Learn how to calculate the net present value (NPV) of your investment projects using builtin functions from Excel using the XNPV function.

Yield Variance
Yield variance describes the difference between actual output ... 
Sales Price Variance
Sales price variance is the difference between the money a business ... 
Production Volume Variance
The production volume variance measures the total amount of overhead ... 
Variability
Variability is the extent to which data points in a statistical ... 
Homoskedastic
Homoskedastic refers to a condition in which the variance of ... 
Autoregressive Conditional Heteroskedasticity  ARCH
Autoregressive conditional heteroskedasticity (ARCH) is a statistical ...