Week 14 : Coefficient of Variation

The coefficient of variation (CV) is a statistical measure of the dispersion of data points in a data series around the mean. The coefficient of variation represents the ratio of the standard deviation to the mean, and it is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from one another.

 

Understanding the Coefficient of Variation

The coefficient of variation shows the extent of variability of data in a sample in relation to the mean of the population. In finance, the coefficient of variation allows investors to determine how much volatility, or risk, is assumed in comparison to the amount of return expected from investments. Ideally, if the coefficient of variation formula should result in a lower ratio of the standard deviation to mean return, then the better the risk-return trade-off. Note that if the expected return in the denominator is negative or zero, the coefficient of variation could be misleading.

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