The coefficient of variation considers how an investment impacts the total risk of the firm, while...

The coefficient of variation considers how an investment impacts the total risk of the firm, while the coefficient of correlation considers the specific risk of an investment.

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Expert Solution

The coefficient of Variation is a measure of of the total risk or volatality assumed in comparison to the amount of expected return from investments. It is a better overall indicator of relative risk among different levels of risk for different securities.

For example, Stock A might have an expected return of 15% and Stock B an expected return of 10%. However, Stock A has a SD of 10%, while Stock B only has a standard deviation of 5%. Which is the better investment?
Stock B is the better investment. Its Coefficient of variation ( COV) = (5% / 10%, or 0.5) is less than the COV for Stock A (10% / 15%, or 0.67). The lower the better.

Coefficient of correlation measures the the degree of relation between two variables and measures the positive or negative correlation between two variables.

The absolute value of the correlation coefficient gives us the relationship strength. The larger the number, the stronger the relationship. For example, |-.75| = .75, which has a stronger relationship than .65.

jeff jeffy answered 2 years ago

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