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Measures of
Variability

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Measures of Variability
 Variability refers to how "spread out" a group of scores
is.
 The terms variability, spread, and dispersion are
synonyms, and refer to how spread out a distribution is.
 It is a useful metric in finance when applied to measure
the variability of investment returns.
 High variability in the returns is associated with a high
degree of risk, whereas low variability is associated with
a relatively low degree of risk.

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Measures of Variability
- ANOTHER STATISTICAL NAME FOR THE
VARIABILITY OR SPREAD OF A GIVEN
DATA SET IS THE MEASURE OF DISPERSION.

- THIS MEASURE DETERMINES WHETHER THE

SET OF OBSERVATIONS TEND TO BE QUITE
SIMILAR (HOMOGENEOUS) OR WHETHER
THEY VARY CONSIDERABLY
(HETEROGENEOUS). 3
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All of the options offer the same mean return, but their returns are spread differently around
the mean. An investor must calculate the standard deviation or variance on each of the
returns to choose which investment offers the least risk. High variability in the returns is
associated with a high degree of risk since returns fluctuate every year. On the other hand,
low variability is associated with a relatively low degree of risk since returns do not vary as
much. The higher the variability, the greater is the uncertainty of getting an assured return.
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To see what we mean by spread
out, consider graphs in Figure 1.
These graphs represent the scores
on two quizzes. The mean score for
each quiz is 7.0. Despite the
equality of means, you can see
that the distributions are quite
different. Specifically, the scores on
Quiz 1 are more densely packed
and those on Quiz 2 are more
spread out. The differences among
students were much greater on
Quiz 2 than on Quiz 1.

Figure 1 : Bar Charts of two quizzes

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The measures of
Measure of variability includes the
Variability range, standard
deviation and variance

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The Range
- THE RANGE OF A SET OF DATA VALUES IS THE
DIFFERENCE BETWEEN THE GREATEST DATA VALUE
AND THE LEAST DATA VALUE

- THE RANGE INVOLVES ONLY THE TWO MOST

EXTREME VALUES IN A GIVEN SET OF DATA, AND
HENCE IT IS NOT RELIABLE.

- IT GIVES A ROUGH ESTIMATE OF VARIABILITY IN A

GIVEN DATA SET.
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Limitation of the Range:

The range is a very crude measurement of the spread

of data because it is extremely sensitive to outliers, and
as a result, there are certain limitations to the utility of a
true range of a data set to statisticians because a
single data value can greatly affect the value of the
range.

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Example
 Find the range of the numbers of ounces
dispensed by Machine 1 given in the
following table

Machine 1:

Range: HV – LV = 10.07 – 5.85 = 4.22

Machine 2:

Range: HV – LV = 8.03 – 7.95 = 0.08

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 Standard
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- A measure of dispersion that is less - A lower value of the standard

sensitive to extreme values is the deviation means that the values
standard deviation. of that given data set are spread
over a smaller range around the
mean.
- The standard deviation of a set of
numerical data makes use of the
individual amount that each data value - a larger value of the standard
deviates from the mean. deviation means that the values
of the data set are spread over a
larger range around the mean.
- The standard deviation indicates how
closely the values of a given data are set
clustered around the mean.

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 Standard
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Standard deviation is a statistical tool business owners can use

to measure and manage risk and help with decision-making. For a
manager wondering whether to close a store with slumping sales,
how to boost manufacturing output, or what to make of a spike in
bad customer reviews, standard deviation can prove a useful tool in
understanding risk management strategies and ultimately, help them
make a sound decision.

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 Formula:
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(𝑥 − 𝜇)2
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝜎 =
𝑛

2
(𝑥 − 𝑥 )
𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝑠 =
𝑛−1

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Example: 13

Solution:
 The following numbers 
𝒙 𝒙 𝒙−𝒙 𝒙−𝒙 𝟐

were obtained by 2 8 −6 36
4 −2 4
sampling a population. 7 −1 1
12 4 16
 2, 4, 7, 12, 15. 15 7 49
𝒙 = 𝟒𝟎
 Find the standard 𝒙−𝒙 𝟐
= 106

deviation of the sample.

𝒏=𝟓
𝒙=𝟖

(𝑥−𝑥 )2 106
𝑠= = = 5.15
𝑛−1 4

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Investments A, B, and C offer the following annual
returns (in %) over a period of five years:

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All of the options offer the same

mean return, but their returns are
spread differently around the
mean. An investor must calculate
the standard on each of the returns
to choose which investment offers
the least risk.

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 Solution:
Click Investment
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Investment
Returns 𝑥 𝒙−𝒙 (𝒙 − 𝒙)𝟐
A Year
1 4 5.2 -1.2 1.44 (𝑥 − 𝑥)2
𝑠=
2 7.5 2.3 5.29 𝑛−1
3 5 -0.2 0.04
13.3
4 3 -2.2 4.84 =
4
5 6.5 1.3 1.69
TOTAL 26 0 13.3
= 1.82
Mean, 𝒙 5.2

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 Solution:
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Investment
Returns 𝑥 𝒙−𝒙 (𝒙 − 𝒙)𝟐
B Year
1 5 5.2 -0.2 0.04 (𝑥 − 𝑥)2
𝑠=
2 5.5 0.3 0.09 𝑛−1
3 6 0.8 0.64
1.3
4 5 -0.2 0.04 =
4
5 4.5 -0.7 0.49
TOTAL 26 0 1.3
= 0.57
Mean, 𝒙 5.2

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 Solution:
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Investment
Returns 𝑥 𝒙−𝒙 (𝒙 − 𝒙)𝟐
C Year
1 8 5.2 2.8 7.84 (𝑥 − 𝑥)2
𝑠=
2 10 4.8 23.04 𝑛−1
3 6 0.8 0.64
74.8
4 -1 -6.2 38.44 =
4
5 3 -2.2 4.84
TOTAL 26 0 74.8
= 4.32
Mean, 𝒙 5.2

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 What
Click is the
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style to Invest? 19

Investment B
Investment A, s = 1.82 is the best
option

Investment B, s = 0.57

Investment C, s = 4.32

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The Variance
A statistic known as the variance is also used as a
measure of dispersion. The variance for a given set of
data is the square of the standard deviation of the
data.

𝑠 = 5.15

𝑠 2 = 5.15 2
= 26.52

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The Coefficient title style
of Variation

A statistic that allows us to compare two different

data sets that have different units of measurement is
known as coefficient of variation. In formula, it is
given by:
𝑠
𝐶𝑉 = ∙ 100%
𝑥
In calculating CV, the higher the coefficient of variation, the
greater the level of dispersion around the mean and the lower
the value of the coefficient of variation, the more precise the
estimate.

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The Coefficient title style
of Variation

- The coefficient of variation (CV) is a statistical

measure of the dispersion of data points in a
data series around the mean.

- The coefficient of variation represents the ratio

of the standard deviation to the mean, and it
is a useful statistic for comparing the degree of
variation from one data series to another,
even if the means are drastically different from
one another.

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The Coefficient title style
of Variation

- In finance, the coefficient of variation allows investors to

determine how much volatility, or risk, is assumed in
comparison to the amount of return expected from
investments.

- Ideally, if the coefficient of variation formula should

result in a lower ratio of the standard deviation to mean
return, then the better the risk-return trade-off.

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Example:
Ron wants to find a new investment for his business portfolio.
He is looking for a safe investment that provides stable return
on investment. The following options for this investments were
considered.
• Ron was offered Stocks of LIZ Corporation with strong
operational and financial performance. The volatility of the
stock is 10% and the expected return is 14%.
• Another option is an Exchange Traded Fund which tracks
S&P 500 index. It offers an expected return of 13% with a
volatility of 7%.
• Next option is Bonds which offers an expected return of 3%
with 2% volatility.
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Solution:
𝑠 10%
𝐶𝑉 𝑆𝑡𝑜𝑐𝑘𝑠 = ∙ 100% = ∙ 100% = 71.4%
𝑥 14%
𝑠 7%
𝐶𝑉 𝐸𝑇𝐹 = ∙ 100% = ∙ 100% = 53.8%
𝑥 13%
𝑠 2%
𝐶𝑉 𝐵𝑜𝑛𝑑 = ∙ 100% = ∙ 100% = 66.7%
𝑥 3%
Based on the results, Ron decided to invest in the ETF because it
offers the lowest coefficient of variation with the most optimal risk to
reward ratio. 25
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Set back and visit your
google classroom and
take a short evaluation!

Good Luck!!!!

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Activity

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