Which one of the following best defines the variance of an investment's annual returns over a number of years?
A) The average squared difference between the arithmetic and the geometric average annual returns
B) The squared summation of the differences between the actual returns and the average geometric return
C) The average difference between the annual returns and the average return for the period
D) The difference between the arithmetic average and the geometric average return for the period
E) The average squared difference between the actual returns and the arithmetic average return

Question

Quizplus · Accepted Answer

Variance measures how far a set of values (in this case, annual returns) is spread out from their average value (in this case, arithmetic average return). The formula for variance involves finding the squared difference between each value and the mean, summing those values up, and dividing by the number of values. Thus, option E - the average squared difference between the actual returns and the arithmetic average return - is the best definition of variance in this context.

Which One of the Following Best Defines the Variance of an Investment's