Question

Calculate the coefficients of variation for the following stocks:

Stock	Expected return	Standard deviation of return
1	0.065	0.29
2	0.04	0.17
3	0.15	0.24

1. What is the coefficient of variation for stock 1?

2.What is the coefficient of variation for stock 2?

3. What is the coefficient of variation for stock 3?

4. If you want to get the best risk-to-reward trade-off, which stock should you buy?

Answer 1

The coefficient of variation is a statistical tool which provides the ratio of the standard deviation to the average(expected) return.

Thus, coefficient of variation = Standard Deviation / Expected Return

1.Coefficient of Variation for stock 1 = 0.29/0.065 = 4.4615 or 4.46

2.Coefficient of Variation for stock 2 = 0.17/0.04 = 4.25

3.Coefficient of Variation for stock 3 = 0.24/0.15 = 1.60

4. If the requirement is to get best risk-to-reward trade-off, the stock with the lowest Coefficient of Variation needs to be bought. Thus, Stock 3 with the lowest Coefficient of Variation is to be bought.