1 / 8

# Variance

Variance. Expected squared deviation from the mean Standard Deviation: Square root of variance Most widely used measures of risk Can calculate from historical data Very easy to calculate in a spreadsheet Often expressed as annualized number. How to calculate variance.

Télécharger la présentation

## Variance

An Image/Link below is provided (as is) to download presentation Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

### Presentation Transcript

1. Variance • Expected squared deviation from the mean • Standard Deviation: • Square root of variance Most widely used measures of risk • Can calculate from historical data • Very easy to calculate in a spreadsheet • Often expressed as annualized number

2. How to calculate variance • Calculate returns each period • Daily, Weekly, or Monthly • Find the average return • Sample mean, CAPM expected return, or Zero • For each period, calculate difference between realized return and expected return • Square them, sum, and divide by N-1 • Or, just use spreadsheet function VAR

3. How to calculate variance • Alternative Formula

4. Calculating Standard Deviation • Calculate Variance • Take the Square Root • Or use spreadsheet function STDEV

5. Annualize • To annualize variance: • For monthly data, multiply by 12 • For weekly data, multiply by 52 • For daily data, multiply by 252 • To annualize standard deviation • Multiply by square root of 12, 52 or 252

6. Volatility • The annualized standard deviation of returns is sometimes called “Volatility”

7. Drawbacks • Variance does not give the whole picture • Skewness may be important • Variance treats large negative events the same as large positive ones

8. Scenario Analysis • Specify hypothetical outcomes • Assign probability distribution • Example: Insurance company • Example: Corporate bond

More Related