Variance
The probability-weighted average of squared deviations from the mean, measuring dispersion. Its units are squared, which is why its square root, the standard deviation, is the figure usually quoted.
Where you will meet it
Variance appears in 41 learning outcomes on the CFA syllabus. A few of them:
- Work out measures of dispersion and explain what they show
“Variance is the mean squared deviation; standard deviation is its square root and shares the units of the data, which is why it is what gets reported.”
- Work out the expected return on a portfolio of two assets
“Portfolio variance depends on the two variances, the weights, and the covariance between the assets, so portfolio standard deviation is generally less than the weighted average of the individual standard deviations.”
- Explain where active risk comes from, and interpret the information ratio and tracking risk
“The trap is adding the two components as standard deviations, or computing their shares from standard deviations rather than variances.”
- Explain how commodity swaps can be used to gain or adjust exposure to commodities
“Variance and volatility swaps pay the gap between realised and agreed variance or volatility.”
See also
Practise it
Practise variance until it is automatic: questions that explain every wrong option.
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