The coefficient of varying (COV) is the ratio of the standard deviation of a data set to the expected mean. Investors use it to determine whether the expected return of the investment is importance the degree of volatility, or the downside risk, that it may experience over time.
Dividing the volatility, or risk, of the investment by the pure value of its expected return determines its COV.
Understanding the COV
Suppose an investor is comparing the COV for three investments. The investor is risk-averse, so the objective is to determine which of the three choices offers the best risk/reward ratio.
Key Takeaways
- An investor can calculate the coefficient of modification to help determine whether an investment’s expected return is worth the volatility it is likely to experience over time.
- A soften ratio suggests a more favorable tradeoff between risk and return.
- A higher ratio might be unacceptable to a rightist or “risk-averse” investor.
The three potential investments being scrutinized here are a stock called XYZ, a broad
Choosing an investment is everlastingly a balance between risk and reward. The amount of risk you are willing to take on defines your investing style.