Question

The variance of a probability distribution is used to measure risk because a higher variance is associated with

A.

a wider spread of values around the mean.

B.

a more compact distribution.

C.

a lower expected value.

D.

both A and B.

Answer 1

The correct option is A. Wider spread of values around the mean .

Variance of a probability distribution refers to a prediction of deviations of some sample variables for individual scores from the mean.The larger the variance the higher the risk is . A high variance usually indicates the higher spread of sample data from the mean through which we can forsee that there will be less returns than expected . Therefore the variance in the probability distribution is like a formula that forecasts the less risky investment and high risky investment . If the investment middles around the mean/center then that means our investment in terms of the' mean ', it incurs less risk ,whereas a high variance indicates that our returns may be considerably away from the mean or average value ,it generally means that we may get far greater returns or far lesser returns .