Variantie

Variance is a measure that reflects the degree of risk in an investment's returns.

It provides insight into the variation of investment returns from their expected value over a period.

Consider Peter. He has invested in two stocks, Stock A and Stock B. They have exhibited different returns in the first five months of the year.

Peter finds the mean return, which is the average return of each stock. Stock A has a mean return of six percent, and Stock B's mean return is four percent.

Next, he calculates the deviations and squared deviations from the mean return for each month for Stock A and B.

To calculate variance, the total of squared deviations is divided by one less than the number of observations. Here it is calculated as four which is one less than the number of observations.

For Stock A, the variance is relatively low, at two point five percent, indicating stable performance. Stock B, however, shows a higher variance of thirty-five point five percent, reflecting high volatility in monthly returns.

Variance helps Peter understand the risk profile of his investments, where Stock A is less risky than Stock B.