Mean Variance Analysis can be defined as a risk assessment tool mostly used by the investors through which they weigh the risk against the expected return from a given investment. While investing in a given asset investors try to look at the expected risk and the expected return associated with that asset and with the help of this comparison make more intelligent and profit oriented investment decisions. The investors tend to an investment where the variance is low on an expected rate of return or they seek an investment where the rate of return is high on a given variance level.
Whenever an investor takes a risk he or she is looking for a higher return against that risk. This is called modern portfolio theory of the investors and mean variance analysis is one of the integral parts of this theory. Mean Variance analysis is comprised of two major components:-
- Mean Variance or Risk
- Expected Return
The variance shows the degree of variability of the data set numbers that are returned from an individual security where as the expected return shows the possible return that is assessed by the investors on a certain investment. For example there are two investment and both these investments are returning the same rate of return the investor must choose the investment with low degree of variance as indicates low risk associated to that investment. In order to avoid high risk or loss an investor must invest in a portfolio by combining different stocks having different levels of variances and expected rate of returns.
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