In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in:
I. Preventing the sum of the deviations from always equaling zero
II. Exaggerating the effects of large positive and negative deviations
III. A number for which the unit is percentage of returns
A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

Squaring the deviations from the mean prevents the sum of the deviations from always equaling zero (I) and exaggerates the effects of large positive and negative deviations (II). However, the unit of variance is not percentage of returns but a squared unit of the original data, such as (percentage)^2 in this case.

In Calculating the Variance of a Portfolio's Returns, Squaring the Deviations