Variance

How widely actual outcomes spread around their average. High variance means individual results routinely land far from the expected value, in both directions.

Example

Two strategies can share the same average return while one delivers it steadily and the other alternates large gains with large losses; the second has higher variance.

Important

Variance is why a sound decision can produce a bad result and a reckless one can produce a windfall - over a small number of attempts, variance rather than skill dominates what you observe.

Related terms

• Expected value — The average outcome of a decision if you could repeat it many times: each possible result multiplied by its probability, all added together.
• Volatility — How much and how often an asset's price moves, up or down, over a given period.
• Risk — The chance that an investment's actual outcome differs from what you expected, in either direction.

Lessons that explain it

• Probability, not certainty — Every investment is a bet on a distribution of outcomes, not a prediction of one. Once you think in probabilities, a loss stops being proof you were wrong. (10 min)
• A good decision can lose, and a bad one can win — Outcomes are made of judgement and luck in unknown proportions. Judging the decision by the result means learning from the luck, which teaches the wrong thing in both directions. (13 min)

All 578 terms in the Investing glossary