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Variance - Coggle Diagram
Variance
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The expected return from a portfolio is the weighted average of the expected returns of the two investments where the weights are the proportions of the available cash invested in each holding
Portfolio variance is a measurement of how the aggregate returns of a number of securities making up a portfolio fluctuate over time
The portfolio variance is calculated using the standard deviations of each security in the portfolio as well as the correlations of each security pair in the portfolio
Portfolio variance looks at the covariance or correlation coefficients for the investments in the portfolio, a lower correlation between securities in a portfolio results in a lower portfolio variance
MPT states that portfolio variance can be reduced by choosing asset classes with a low or negative correlation
Portfolio variance is a weighted combination of the individual variances of each of the assets adjusted by their covariances, this means the overall portfolio variance is lower than a simple weighted average of the individual
Variance measures the variability or volatility from an average or mean and volatility is a measure of risk; variance will help an investor determine the risk they might take on when assessing a new investment
A variance value of zero means that all values within a group of numbers are the same and that all variances that are non-zero will be positive numbers (because they have been squared)
A large variance indicates that numbers in the set are far from the mean and each other (high volatility) while a small variance indicates little volatility