CFA Level 1 – Quantitative Methods, Variance and Standard Deviation
Variance and Standard Deviation underpin a lot of derivatives (especially options) calculations and are introduced in Level 1 and then used extensively in Levels 2 and 3. Variance and Standard deviation are both measures of the deviation of a series of numbers from their mean.
- Variance : The average the the squared deviations from the the mean. Thus, each observation’s deviation from the arithmetic mean is squared and then the arithmetic mean of the squares is calculated.
- Standard Deviation : The square root of the variance. Thus standard deviation is in the same units as the original set of data.