What is 'Variability'

Variability is the extent to which data points in a statistical distribution or data set diverge from the average, or mean, value as well as 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.

BREAKING DOWN 'Variability'

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 a much lower return variability. Variability refers to the difference being exhibited by data points within a dataset, as related to each other or as related to the mean. This can be expressed through the range, variance or standard deviation of a dataset.

The range refers to the difference between the largest and smallest value assigned to the variable being examined. In statistical analysis, the range is represented by a single number. The variance is the square of the standard deviation based on a list of data points, while the standard deviation is representative of the spread existing between data points.

Variance With Regards to the Mean

The mean, or average, value of a dataset represents a midpoint of the values expressed within the data. This is separate from the median, which refers to the exact value of the data point that falls at the center of the data points should they be listed in ascending or descending order based on numerical value. While the median must be represented by the precise value of the midvalued data point, the mean may or may not be actually reflected as a figure within the dataset.

While the range only focuses on the most extreme data points, the variance considers the placement of each data point and is used as a source of information regarding overall data distribution.

Variability in Investing

Variability is used to standardize the returns obtained on an investment and provides a point of comparison for additional analysis. 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. In essence, the Sharpe ratio provides a metric to compare the amount of compensation an investor receives with regard to the overall risk being assumed by holding said investment. The excess return is based on the amount of return experienced beyond investments that are considered free of risk. All else being equal, the asset with the higher Sharpe ratio delivers more return for the same amount of risk.

RELATED TERMS
  1. Standard Deviation

    The standard deviation is a statistic that measures the dispersion ...
  2. Variance

    Variance is the spread between numbers in a data set and their ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, ...
  4. Variable Overhead Efficiency Variance

    Variable overhead efficiency variance is the difference between ...
  5. Variable Overhead Spending Variance

    Variable overhead spending variance is the difference between ...
  6. Variable Cost Ratio

    The variable cost ratio compares costs, which fluctuate depending ...
Related Articles
  1. Investing

    Stock and Flow Variables Explained: A Closer Look at Apple

    The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc.
  2. Investing

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  3. Investing

    PRHSX: Risk Statistics of Health Sciences Mutual Fund

    Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk.
  4. Investing

    Why Standard Deviation Should Matter to Investors

    Think of standard deviation as a thermometer for risk, or better yet, anxiety.
  5. 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.
  6. Managing Wealth

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments—weighing the pros and cons.
  7. Trading

    Improve your investing with Excel

    Find out how to use Excel, a useful tool for assisting with investment organizations and evaluations.
  8. Trading

    The linear regression of time and price

    This investment strategy can help investors be successful by identifying price trends while eliminating human bias.
  9. Investing

    Understanding Quantitative Analysis Of Hedge Funds

    Analyzing hedge fund performance quantitatively requires metrics such as absolute and relative returns, risk measurement, and benchmark performance ratios.
  10. Investing

    5 ways to measure mutual fund risk

    Statistical measures such as alpha and beta can help investors understand investment risk on mutual funds and how it relates to returns.
RELATED FAQS
  1. 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 >>
  2. What is the difference between the expected return and the standard deviation of ...

    Learn about the expected return and standard deviation and the difference between the expected return and standard deviation ... Read Answer >>
  3. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of and mathematical principles behind standard deviation as a measurement of portfolio ... Read Answer >>
  4. How can I measure portfolio variance?

    Find out more about portfolio variance, the formula to calculate portfolio variance and how to calculate the variance of ... Read Answer >>
  5. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center