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Why is the coefficient of variation preferred over standard deviation as a measure of volatility?

Why is the coefficient of variation preferred over standard deviation as a measure of volatility?

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Answer #1

The coefficient of variation is a better risk measure than the standard deviation alone because the Coefficient of Variation adjusts for the size of the project. The formula to calculate

CoV = standard deviation / mean

It means CoV takes the standard deviation into context.

Again, When you have huge differences in means and want to compare their variation, it would be better to take the coefficient of variation, because it normalizes the standard deviation with respect to the mean.

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