Question

Which of the following stocks is less risky? Stock Average Return Standard Deviation Coefficient of Variation X 10% 40% 4 Y 20% 40% 2

Answer 1

Answer:

Stock X has a CV of 4 while Stock Y has a CV of 2. As stock Y has a lower CV than Stock X, it is less riskier.

Explanation:

The coefficient of variation is a statistical model which is also used to determine the volatility per unit of a factor. In terms of a stock, the coefficient of variation calculates the volatility of its return. It is calculated by dividing the stock's standard deviation, which is a measure of risk, by the stock's mean return or expected return.

CV = SD / r

Where,

• CV is coefficient of variation
• SD is standard deviation
• r is expected return

The CV of a stock tells us the risk per unit of return. The higher the CV, the riskier the stock and vice versa.

Stock X has a CV of 4 while Stock Y has  a CV of 2. As stock Y has a lower CV than Stock X, it is less riskier.