WFU Law School
Law & Valuation
2.2.4 Normal Distribution

2.2.5 Coefficient of Variation

What happens when there are two distributions with different expected returns? How do you decide which distribution involves greater dispersion and thus greater risk? For example, suppose you are presented with two investment strategies.

Plan A
Plan B
Expected return
15%
20%
Standard deviation
5%
6%
Coefficient of variation
.333
.300

Plan A offers a lower expected return, but with less variability, than Plan B. Which is less risky? Actually, Plan B has less relative risk. The coefficient of variation -- that is, the ratio of variability to return -- is higher for Plan A (5/15 = .33) compared to Plan B (6/20 = .30). There is greater relative risk that returns will deviate from the expected return under Plan A.

2.2.4 Normal Distribution

©2003 Professor Alan R. Palmiter

This page was last updated on: March 16, 2004