Answer to Question #310313 in Finance for Comfort

Question

Some financial theories consider the variance of the distribution of expected rates of return to be a good measure of uncertainty. Discuss the reasoning behind this measure of risk and it's purpose.

Answer 1

The variance of expected returns represents a measure of the dispersion of actual returns around the expected value. The larger the variance is, everything else remaining constant, the greater the dispersion of expectations and the greater the uncertainty, or risk, of the investment. The purpose of the variance is to help measure and analyze the risk associated with a particular investment.