Answer to Question #310317 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

Variance is the measure of the degree of risk in investment by finding the average of the squared deviations from the mean rate of return. This can help one build a portfolio for an investor. The result from the size and industry collections indicates that the conditional covariances of fairness portfolios with, market and uncertainty predict the time series and cross-sectional variation in stock yields.