Mean-Variance Analysis

Mean-variance analysis is the process of weighing risk, expressed as variance, against expected return. Investors use mean-variance analysis to make investment decisions. Applying mean-variance analysis enables investors to gauge the risk (variance) and volatility (standard deviation) of investments against their expected returns and to invest in a way that optimises the return profile of a portfolio based on risk tolerances. This approach will lead investors to choose an investment option with lower variance over one with higher variance for the same expected return. Or, in the case of two investment options with the same variance, the investor should opt for the one with a better return profile.