What is a Mean-Variance Analysis?

The Mean-variance analysis is otherwise called the modern portfolio theory. This is a theory that assesses the risks and expected return of an investment portfolio in order to match the expected return with a given level of risk. The mean-variance analysis weighs the risk of the portfolio, otherwise called the variance against the expected return. The mean-variance analysis is an important analysis for investors as it helps them determine the difference between the expected return of a portfolio and its variance. Since investors are constantly in search of a portfolio with higher returns and lower risks, this analysis helps them find their desired results.

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How is a Mean-Variance Analysis Used? 

The mean-variance analysis is an important process that helps investors make logical decisions pertaining to investment. With this analysis, investors can determine how much risks they are willing to take in exchange for an expected return. Once an investor knows his level of risk tolerance, making decisions about what portfolio to invest in becomes easier. The mean-variance analysis also facilitates the comparison of risk (variance) with the likely reward in an investment. This form of analysis is a crucial part of the modern portfolio theory. Hence, with mean-variance analysis, investors can make rational decisions about investing in securities with different expected returns and variance.

Sample Mean-Variance Analysis

Mean-Variance Analysis also allows investors to evaluate investments with the highest expected returns and risks. For instance, if an investor has an option to choose between the two portfolios with different degrees of risks and returns, the investor can do a Mean-Variance Analysis to decide which is more profitable. The correlation or relationship between the investments in the portfolios is also an indicator of which portfolio would be more favorable than the other.