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Coefficient of variation measures the dispersion of data points around the mean, a statistical average.

It represents the ratio of a group of data’s standard deviation to its mean. It’s useful for comparing the degree of variation among different series of data.

Investors use coefficient of variation to measure the volatility of an investment compared to its expected return. The lower the ratio, the better the risk-return tradeoff. The formula is standard deviation divided by expected return.

Suppose an investor is considering three investments. Investment A is a stock with a volatility, or standard deviation, of 11% and an expected return of 15%. Its coefficient of variation is about .73. Investment B is another stock. It has a volatility of 16% and an expected return of 19%. Its coefficient of variation is about .84. And Investment C, a bond, has a volatility of 6% and an expected return of 10%. Its coefficient of variation is .60.

If the investor’s main objective is to minimize risk, he will likely choose C. It has the lowest coefficient of variation, or the best risk-return tradeoff.

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