Variance

The average squared deviation from the mean, measuring how widely outcomes are spread. For independent variables the variances add.

Where you will meet it

Variance comes up in 102 learning outcome notes across the FRM syllabus. A few of them:

• Using Futures for Hedging
  FRM Part I · Financial markets and products

  “Effectiveness is the proportion of variance removed, which is ρ², the regression R².”

• How Do Firms Manage Financial Risk?
  FRM Part I · Foundations of risk management

  “The hedge then removes only a fraction of the variance, equal to ρ² in the standard minimum-variance result.”

• Random Variables
  FRM Part I · Quantitative analysis

  “The second central moment is the variance, the average of the squared deviations: Variance = E((X − μ)²).”

• Measures of Financial Risk
  FRM Part I · Valuation and risk models

  “For two assets, the portfolio variance is given by Variance = w1² × σ1² + w2² × σ2² + 2 × w1 × w2 × ρ × σ1 × σ2.”

All terms beginning with V · FRM glossary

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