We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Portfolio Variance?

Malcolm Tatum
By
Updated May 17, 2024
Our promise to you
WiseGEEK is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGEEK, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Portfolio variance is a process that identifies the degree of risk or volatility associated with an investment portfolio. The basic formula for calculating this variance focuses on the relationship between what is known as the return variance and the covariance that is associated with each of the securities found in the portfolio, along with what percentage or portion of the portfolio that each security represents. The idea behind portfolio variance is to determine if the current combination of assets found in the portfolio are generating a favorable return overall, while also assessing the performance of each security contained within the portfolio.

In order to understand how portfolio variance is calculated, it is necessary to define what is meant by covariance and return variance. Covariance is the relationship that exists between two random variables; in the case of assessing the performance of a portfolio, this refers to the relationship between any two of the assets held in the portfolio. Return variance looks at the rate of return of a security in comparison with another security within the portfolio. By considering both these elements, it becomes easier to identify how each of the securities are working to enhance the value of the portfolio, or how specific assets are actually inhibiting the growth process for the portfolio.

Taking the time to identify the rate of portfolio variance that is present in any given portfolio is important for two reasons. First, the process can aid the investor in managing to maintain a balance of assets within the portfolio itself. This is essential if the investor is to minimize the impact of a downturn within a certain market on the portfolio. By maintaining that balance, it is possible for commodities and bond issues to help offset any losses that take place when stocks traded on a given market go through some type of temporary slump.

The second benefit to determining portfolio variance has to do with assessing how well the current assets are helping the investor reach his or her financial goals. In the event that progress toward those goals is not proceeding at the pace originally projected, the process can help the investor develop a plan to overhaul the structure of the portfolio. The plan may involve selling some assets while acquiring others, or holding on to all current assets while adding new investments to the mix. Enhancing portfolio variance may also involve activities like shifting the contents of the portfolio so that investments other than shares of stock compose a higher percentage or proportion of the overall value of the portfolio.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

Malcolm Tatum

Malcolm Tatum

Writer

Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.