How to Calculate Variance in Finance

by Stephanie Ellen

The variance of a portfolio can be a valuable measure of how well a financial investment is performing. Variance is defined as the average of the squared differences from the mean. The square root of the variation, known as standard deviation, is used to show how spread out a set of numbers are from the mean. In general, the lower the standard deviation, the closer the investments are in performance. A high variance indicates the investments are performing at very different rates.

Find the sample mean. The sample mean is the average of the results. For example, if you have 3 stocks in your sample with an average return of 2, 1 and 3, then the mean is (2 + 1 + 3) / 3 = 2.

Subtract the mean from each value in the sample. In this example, 2 - 2 = 0; 1 - 2 = -1; and 3 - 2 = 1.

Square each value you obtained in Step 2. In this example, 0^2 = 0, -1 ^ 2 = 1 and 1 ^ 2 = 1.

Add up the values you calculated in step 3. In this example, 0 + 1 + 1 = 2.

Subtract 1 from the total number of items in the portfolio. In this example, 3 - 1 = 2.

Divide the result in Step 4 from the result in Step 5. In this example, 2 / 2 = 1. This is the portfolio's variance.

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About the Author

Stephanie Ellen teaches mathematics and statistics at the university and college level. She coauthored a statistics textbook published by Houghton-Mifflin. She has been writing professionally since 2008. Ellen holds a Bachelor of Science in health science from State University New York, a master's degree in math education from Jacksonville University and a Master of Arts in creative writing from National University.

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