Enter the individual return, mean return, and total number of returns into the calculator to determine the variance of returns.
Variance Of Returns Formula
The following formula is used to calculate the variance of returns.
V = Σ((Ri - Rm)^2) / N
Variables:
- V is the variance of returns
- Ri is the individual return
- Rm is the mean return
- N is the total number of returns
To calculate the variance of returns, subtract the mean return from each individual return, then square the result. Sum up all these squared results. Finally, divide the sum by the total number of returns.
What is a Variance Of Returns?
Variance of returns is a statistical measurement used in finance that quantifies the dispersion of returns of a financial instrument such as a stock or a portfolio. It measures the degree to which the returns deviate from the mean or average return over a certain period. A high variance indicates that the asset’s returns are spread out over a larger range of values and thus, the asset is more volatile or risky. Conversely, a low variance indicates that the returns are closer to the mean and the asset is less volatile.
How to Calculate Variance Of Returns?
The following steps outline how to calculate the Variance of Returns.
- First, gather the individual returns (Ri) and the mean return (Rm).
- Next, subtract the mean return from each individual return (Ri – Rm).
- Next, square the result of each subtraction ((Ri – Rm)^2).
- Next, sum up all the squared differences (Σ((Ri – Rm)^2)).
- Finally, divide the sum by the total number of returns (N) to calculate the Variance of Returns (V = Σ((Ri – Rm)^2) / N).
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem :
Use the following variables as an example problem to test your knowledge.
individual return (Ri) = [10, 15, 12, 8, 9]
mean return (Rm) = 11
total number of returns (N) = 5
