Portfolio Variance

The purpose of an investment portfolio: to make as much money as possible, while taking as little risk as you can get away with.

Because the financial world is overrun with the graduates of highfalutin business schools and holders of various math-based degrees, this general concept can't just stand at that. It has to get slathered with lots of complicated calculations and important-sounding jargon.

The ideas we noted above (maximizing returns and minimizing risk) contribute to a concept known as modern portfolio theory (jargon alert!). Meanwhile, the risk aspect gets measured in an equation tracking what's called variance (calculation alert!). Modern portfolio theory seeks to provide a mathematical description of the risk/reward balance inherent in any portfolio. That way, fund managers can crunch the numbers and see if they really have ample diversification. Portfolio variance measures this quality. It determines whether the assets in a portfolio are too closely correlated in performance to provide meaningful diversification.