Canadian Securities Course (CSC) Level 2 Practice Exam

What does variance measure when assessing investments?

1. The relationship between two variables

2. The average distance of every score from the mean

3. The excess returns because of investors' skills

4. The difference between expected and actual outcomes

The correct answer is: The difference between expected and actual outcomes

The correct answer focuses on the difference between expected and actual outcomes, which is a fundamental concept in risk assessment and performance measurement in investments. Variance quantifies how much the actual returns of an investment differ from its expected return. This measure is crucial for investors when evaluating the level of risk associated with an investment—the higher the variance, the more unpredictable or volatile the investment is. By calculating variance, investors can gain insight into the potential fluctuations in their investment returns, aiding their decision-making processes. Understanding variance helps in portfolio management as well, as it allows investors to assess and balance risk relative to their own investment strategies and objectives. The other options, while related to various aspects of data analysis and investment assessment, do not directly define variance. The relationship between two variables pertains more to correlation, average distance from the mean refers to standard deviation, and excess returns relate to performance attribution rather than a measure of variance itself.