What term refers to the difference between possible realized returns and expected returns?

The term that refers to the difference between possible realized returns and expected returns is commonly known as "alpha." Alpha measures the performance of an investment relative to a market index or benchmark and indicates the value that a portfolio manager adds beyond a benchmark's performance. In this context, when discussing realized returns and expected returns, alpha quantifies the excess return of an investment over the expected return, accounting for the risk taken.

The selected answer, variance, does relate to the variability of returns but does not directly address the difference between possible realized returns and expected returns. Variance measures how much the returns on an investment are dispersed around the average return, which informs us about the investment's risk but does not pinpoint the discrepancy between realized and expected returns.

Therefore, understanding alpha helps investors assess an investment's performance, particularly in active management, by distinguishing the returns attributable to the manager's actions from those due to market movements.