Arduino ADC converter calculation
Your calculation is not correct. The encoder has its 0 to 10V output voltage distributed over the whole distance, that the cable can reach, so 1.25m. And that gives you the resolution: 1.25m/1024 = 1.22mm. The resolution doesn't change, if you use less than the maximum length. It's still the same resolution of about 1.22mm. The encoder doesn't care, if you are only using 1m of its range.