Coefficient of Variation Indicates Proportionate Risk

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Coefficient of Variation Indicates Proportionate Risk

The coefficient of variation divides a security’s standard deviation by its mean (average) price and multiplies it by 100. This tells investors how big the security’s variance really is relative to its typical prices. It compares the risks of assets with varying averages to their expected returns.

Things To Know

  • Coefficient of variation measures how much a security’s price varies compared to its typical prices.

How it works

For example, say you have two stocks. Stock A has an average price of $100 and a standard deviation of $10. Stock B has an average price of $50 and a standard deviation of $10. To find out which stock is riskier, you can use the coefficient of variation.

  • Stock A CV: 10/100 x 100 = 10%
  • Stock B CV: 10/50 x 100 = 20%

Because it has a proportionally higher standard deviation, stock B is the riskier stock.