Page 177 - BA2 Integrated Workbook - Student 2017

Risk 1: summarising and analysing data

5.3 Coefficient of variation

The coefficient of variation is a statistical measure of the dispersion of data points in
a data series around the mean. It is calculated as follows:

Standard deviation
Coefficient of variation = ———————
Mean

The coefficient of variation is the ratio of the standard deviation to the mean, and is
useful when comparing the degree of variation from one data series to another, even
if the means are quite different from each other. Dividing by the mean gives a sense
of scale to the standard deviation, so the coefficient of variation is often given as a
percentage to aid comparison.

In a financial setting, the coefficient of variation allows you to determine how much
risk you are assuming in comparison to the amount of return you can expect from an
investment. The lower the coefficient of variation, the better the risk-return trade-off
will be.

Go through illustration 18

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