Loading the player...

What is a 'Coefficient Of Variation - CV'

A coefficient of variation (CV) is a statistical measure of the dispersion of data points in a data series around the mean. It is calculated as follows: (standard deviation) / (expected value). 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. It is calculated as follows:

Coefficient Of Variation (CV)

BREAKING DOWN 'Coefficient Of Variation - CV'

In the investing world, the coefficient of variation allows you to determine how much volatility, or risk, you are assuming in comparison to the amount of return you can expect from your investment. In simple language, the lower the ratio of standard deviation to mean return, the better your risk-return tradeoff. Note that if the expected return in the denominator of the calculation is negative or zero, the coefficient of variation could be misleading.

Coefficient of Variation for Selecting Investments

The coefficient of variation could help investors select investments based on the risk/reward ratio and their profiles. For example, an investor who is risk-averse may want to consider assets that have historically had a low degree of volatility and a high degree of return, in relation to the overall market or its industry. Conversely, risk-seeking investors may look to invest in assets that have had a high degree of volatility.

For example, assume a risk-averse investor wishes to invest in an exchange traded fund (ETF) that tracks a broad market index. The investor narrowed the ETFs down to the SPDR S&P 500 ETF, PowerShares QQQ ETF, and the iShares Russell 2000 ETF. The investor analyzes the ETFs' returns and volatility over the past 15 years, and the investors assumes the ETFs could be expected to have similar returns to their long-term averages.

The SPDR S&P 500 ETF has an average annual return of 5.47% and standard deviation of 14.68% over the past 15 years, as of May 31, 2016. Therefore, SPY has a coefficient of variation of 2.68. The PowerShares QQQ ETF has an average annual standard deviation of 21.31% and return of 6.88% over the same period. Consequently, QQQ has a coefficient of variation of 3.09. The iShares Russell 2000 ETF has an average annual return of 7.16% and standard deviation of 19.46%. Therefore, IWM has a coefficient of variation of 2.72. Based on the approximate figures, the investor could invest in either the SPDR S&P 500 ETF or the iShares Russell 2000 ETF, since the risk/reward ratios are approximately in line.

  1. Pearson Coefficient

    Pearson coefficient is a type of correlation coefficient that ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated ...
  3. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  4. Downside Risk

    An estimation of a security's potential to suffer a decline in ...
  5. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  6. Benchmark For Correlation Values

    A benchmark or point of reference chosen by an investment fund ...
Related Articles
  1. Investing

    What's the Correlation Coefficient?

    The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ...
  2. Investing

    Are Your ETFs Too Risky? Learn How to Evaluate Them

    Learn how to identify ETFs with greater risk and volatility. See why some investors include higher volatility ETFs in pursuit of greater returns.
  3. Investing

    SPLV vs. LGLV: Comparing Low-Volatility ETFs

    Discover the major differences between two competitive low-volatility ETFs, and learn why one may be more suitable for your portfolio than the other.
  4. Investing

    XLI Vs. VIS: Comparing Industrials ETFs

    Learn about the industrials sector, how it has fared during the market selloff, and read a comparative analysis of SPDR and Vanguard Industrial ETFs.
  5. Investing

    The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  6. Investing

    4 Ways to Evaluate ETFs Before Buying

    Learn four areas in which to evaluate an ETF investment to be sure that the investor has a clear understanding of the security being purchased.
  7. Investing

    Top ETFs And What They Track: A Tutorial

    This Investopedia tutorial provides an introduction to the leading exchange-traded funds by assets under management, broken down by market category.
  8. Investing

    A Look At the Growth Of the ETF Industry

    Explore the phenomenal growth rate of the ETF industry, and learn some of the principal reasons why ETFs are projected to continue to grow at a rapid pace.
  9. Financial Advisor

    S&P 500 ETFs: What Every Investor Should Know

    Before you invest in that SPDR S&P 500 ETF (or any other ETF based on that index) here are a few things to consider.
  1. How does the risk of investing in the Internet sector compare to the broader market?

    Learn how the risk of investing in the Internet sector compares to the broader market and what steps investors take to mitigate ... Read Answer >>
  2. What does a negative correlation coefficient mean?

    Discover the meaning of a negative correlation coefficient, how this compares to other correlation coefficients and examples ... Read Answer >>
  3. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of and mathematical principles behind standard deviation as a measurement of portfolio ... Read Answer >>
  4. How does correlation affect the stock market?

    Learn about the role correlation plays in prudent stock market investing, and how the correlation coefficient is used to ... Read Answer >>
  5. Can the correlation coefficient be used to measure dependence?

    Understand the coefficient of correlation and its use in determining the relationship between two variables through the concepts ... Read Answer >>
  6. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation, and how it is used to measure risk in the ... Read Answer >>
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center