Understanding Risk , What is Risk? , Coefficient of Variation

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Understanding Risk

Chapter: 7 Understanding Risk

Section: 1 What is Risk?

Sub Section: 1 Coefficient of Variation

What if the two stocks offered different returns and different standard deviations?

In this way, one measure could be the risk per unit of return i. e. standard deviation of returns divided by expected return. This measure is called coefficient of variation.

	Stock C	Stock D
Expected Return	10%	15%
Standard Deviation	5%	10%
Coefficient of Variation	5% / 10% = 0.50%	10% / 15% = 0.67%

Hence, even though stock D offers a higher expected return, it is a poor investment in relation to its risk.

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Test Quiz

Understanding Risk

Stock C

Stock D

Expected Return

10%

15%

Standard Deviation

5%

10%

Coefficient of Variation

5% / 10% = 0.50%

10% / 15% = 0.67%

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