Question

Five investment alternatives have the following returns and standard deviations of returns.     
  

Alternatives	Returns: Expected Value			Standard Deviation
A	$	2,070		$	780
B		1,080			770
C		6,700			10,100
D		1,820			1,200
E		64,200			13,200

   
Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by using the coefficient of variation. (Round your answers to 3 decimal places.)
  

Answer 1

The formula for Coefficient of Variation = CV = (Standard Deviation /Mean or Expected Value) * 100%

Stock A:

CV = (780/2070) * 100 = 37.681%

Stock B:

CV = (770/21080) * 100 = 71.296%

Stock C:

CV = (10,100/6700) * 100 = 150.746%

Stock D:

CV = (1200/1820) * 100 = 65.934%

Stock E:

CV = (13200/64200) * 100 = 20.56%

Coefficient of variation determines the amount of volatility or risk(standard deviation) in comparision to amount of expected return(mean) from the investment. So, if CV will be high if standard deviation is high.So, high CV represents higher volatiliry i.e risk and low CV represents lower volatility and lower risk.

Stock Ranking

E 1(lowest risk)

A 2

D 3

B 4

C 5(highest risk)