In terms of investment risk, what does an increase in variance typically signify?

An increase in variance is a statistical measure that reflects the degree of variability or spread in a set of data points. In the context of investment risk, a higher variance indicates that the returns on an investment are more spread out over time, meaning that the potential outcomes can vary significantly from the average return. This greater variability implies that the investment carries a higher risk.

When investors consider variance in their decision-making, they generally prefer investments that provide more predictable returns, as a high variance suggests that returns could deviate widely from expected outcomes. Therefore, when variance increases, it signifies an elevation in investment risk, as the likelihood of experiencing both higher gains and greater losses becomes more pronounced. This relationship makes it clear why the answer indicating increased risk is the correct choice.