Contents
How can portfolio variance be reduced?
Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative correlation, such as stocks and bonds, where the variance (or standard deviation) of the portfolio is the x-axis of the efficient frontier.
What is a stock variance?
Variance is a measure of volatility because it measures how much a stock tends to deviate from its mean. The higher the variance, the more wildly the stock fluctuates. Accordingly, the higher the variance, the riskier the stock.
Is lower variance better?
Low variance is associated with lower risk and a lower return. High-variance stocks tend to be good for aggressive investors who are less risk-averse, while low-variance stocks tend to be good for conservative investors who have less risk tolerance. Variance is a measurement of the degree of risk in an investment.
What does it mean if the variance is high?
A high variance indicates that the data points are very spread out from the mean, and from one another. Variance is the average of the squared distances from each point to the mean. The process of finding the variance is very similar to finding the MAD, mean absolute deviation.
What is an uncertain or risky return?
What is an uncertain or risky return? it is the portion of return that depends on information that is currently unknown. What is the definition of expected return? it is the return that an investor expects to earn on a risky asset in the future.
What does the minimum variance portfolio tell us?
Definition: A minimum variance portfolio indicates a well-diversified portfolio that consists of individually risky assets, which are hedged when traded together, resulting in the lowest possible risk for the rate of expected return.
What is a good variance?
As a rule of thumb, a CV >= 1 indicates a relatively high variation, while a CV < 1 can be considered low. This means that distributions with a coefficient of variation higher than 1 are considered to be high variance whereas those with a CV lower than 1 are considered to be low-variance.
What does a high variance tell you?
A large variance indicates that numbers in the set are far from the mean and far from each other. A small variance, on the other hand, indicates the opposite. A variance value of zero, though, indicates that all values within a set of numbers are identical. Every variance that isn’t zero is a positive number.
How to calculate the variance of a stock?
The value of stock A is $60,000, and its standard deviation is 15%, while the value of stock B is $90,000, and its standard deviation is 10%. There is a correlation of 0.85 between the two stocks. Determine the variance. Correlation, ρ A,B = 0.85 Below is data for the calculation of the portfolio variance of two stocks.
How can I lower the variance of my portfolio?
There are cases where assets that might be risky individually can eventually lower the variance of a portfolio because such an investment is likely to rise when other investments fall. As such, this reduced correlation can help in reducing the variance of a hypothetical portfolio.
How to minimise stock variances in your business?
If you have to recount a location’s inventory to find where the variances are, it’s a waste of your company’s resources. Do it right from the start, and you eliminate excess costs. Train staff and inform them of why you need to record all stock movements.
How to reduce the variance of an estimate?
The solutions for reducing the variance are also intuitive. Repeat the estimate on many different small samples of data from the domain and calculate the mean of the estimates, leaning on the central limit theorem. The mean of the estimated means will have a lower variance.