The variance of returns is computed by dividing the sum of the:
A)squared deviations by the number of returns minus one.
B)average returns by the number of returns minus one.
C)average returns by the number of returns plus one.
D)squared deviations by the average rate of return.
E)squared deviations by the number of returns plus one.

Question

Quizplus · Accepted Answer

The formula for variance of returns is the sum of squared deviations divided by the number of returns minus one. This formula takes into account the variability in returns over time, and uses the squared deviations (i.e., the difference between actual returns and the average return, squared) to measure the extent of this variability. By dividing this sum by the number of returns minus one, we adjust for the fact that we are estimating the population variance from a sample, and this requires the use of a slightly different formula than for the population variance.

The Variance of Returns Is Computed by Dividing the Sum