Variance of Returns

What is Variance?

Variance measures the statistical dispersion of a return series by squaring each deviation from the mean and averaging them. Because deviations are squared, large outlier returns (both positive and negative) are penalised disproportionately, making variance highly sensitive to extreme observations. In portfolio theory, variance plays a central role in mean-variance optimization: a portfolio's total variance depends on the individual asset variances and their pairwise covariances. Variance is mathematically convenient because it is additive when assets are uncorrelated, but its squared units (percent squared) make it harder to interpret intuitively than standard deviation. The calculator uses the sample formula (N−1 denominator).