Why can variance be used to measure risk?

Probability theory. The variance is used to measure random variables and their mathematical expectations.

i.e. the degree of deviation between the mean. Variance in statistics (sample variance) refers to the average of each sample value and the overall sample value.

The average of the squared values of the difference. In many practical problems, it is important to study the variance, i.e., the degree of deviation. Variance is a measure of the difference between the source data and the expected value.

Risks are all uncertainties that arise from future events, and from a mathematical point of view, they indicate the likelihood of various outcomes occurring. In corporate finance, the study of risk is to study the risk compensation of investment, and the mathematical measure of risk is the degree of dispersion between the actual rate of return and the expected rate of return of an investment (asset).

to represent. The most common metrics are variance and standard deviation.

In probability theory and mathematical statistics, variance is a measure of the degree of deviation between a random variable and its mathematical expectation (i.e., the mean). Generally speaking, the greater the variance, the greater the volatility of this set of data, in other words, the less stable it is. When venture capitalists invest, they must pay attention to whether the risks of the invested project are within their acceptable range.

If it is, then he will invest, and if it is more than he can afford to lose, then he will most likely not take a big risk to invest. Under the conditions of market economy, the risks of enterprises are nothing more than operational risks, strategic risks, financial risks, default risks, legal risks, market risks, etc. For example, venture capitalists can make an objective understanding of a company by analyzing its cash flow, net profit, net income per share, solvency, operating ability, profitability and other indicators.

These indicators are generally annual, and their variance or standard deviation can be calculated by comparing them with those of previous years to see how they increase or decrease. In this way, we can get a general understanding of the operating conditions of an enterprise and get a trend. So that they can make more rational investments.

Therefore, variance can be used to measure the magnitude of the risk.

The risk variance is calculated as: RP = QR wind + (1-Q)R.

Because there is a correlation between different assets.

Therefore, the risks cannot be directly superimposed, i.e. weighted average.

Consider the impact of being interrelated on your portfolio. That is, the correlation coefficient in the cov inside.

International Investment Risk:

International investment is different from domestic investment due to the political, economic, cultural, social environment and even political system of each country.

Investors will face different degrees of commercial and political risks. Investors generally make prudent capital investments based on in-depth research and analysis of the investment environment in the target country. As a result, international private investment is usually driven by an assessment of the favourable investment climate.

What is the formula for variance in the VaR section? " src=""

Categories: Business Banking >> Finance & Tax.

Problem description: I'm listening to a faux brigade. The variance formula in financial management seems to be different from the mathematical.

Question Bench Supplement: The mathematical formula has been learned at the beginning of the lesson.

It seems that the financial management is a little different.

Please give a detailed formula.

Thank you!! Analysis:

e(x-average) 2 * percentage factor.

The e in front is the sigma. It's additive.

The last two represent squares

Summary. Hello dear, the portfolio variance formula includes the variance of the entire portfolio, which is determined by the variance of all the assets in the portfolio and the covariance between all the assets. In this formula, systemic risk mainly comes from the covariance between assets, because it represents the degree of correlation between assets, that is, how the volatility of one asset affects the ** of other assets.

Specifically, systemic risk in the portfolio variance formula is often reflected in the covariance terms, as these terms take into account the impact of the overall market or economic environment on various assets. In contrast, unsystematic risk comes more from the volatility and unique information of a particular asset itself.

Can you add, I don't quite understand it.

Hello dear, the portfolio variance formula includes the variance of the entire portfolio, which is determined by the variance of all assets in the portfolio and the covariance between all assets. In this formula, systemic risk mainly comes from the covariance between assets, because it represents the degree of correlation between assets, that is, how the volatility of one asset affects the volatility of other assets. Specifically, systemic risk in the portfolio variance formula is often reflected in the covariance terms, as these terms take into account the impact of the overall market or economic environment on various assets.