Answer (C) is correct . The coefficient of variation of an investment is calculated by dividing the standard deviation by the expected rate of return. This standard deviation is the square root of the sum of all the probability-weighted squared variances of the projected returns. Thus, the standard deviations of the three stocks presented are, respectively, 2.45, 2.24, and 2.00. Dividing each by the expected rate of return gives the coefficient of variation (Stock A:? 2.45 ¡Â 3% = 81.7; Stock B:? 2.24 ¡Â 4% = 56.0; Stock C:? 2.00 ¡Â 2% = 100). Stock C is therefore the riskiest on a per-unit of return basis.<
Answer (A) is incorrect because The coefficient of variation for Stock?A is 2.45, which is higher than that for Stock C.
Answer (B) is incorrect because The coefficient of variation for Stock B is 2.24, which is higher than that for Stock C.
Answer (D) is incorrect because The variation for Stock A is 2.45, which is higher than that for Stock C.
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The coefficient of variation is useful when the rates of return and standard deviations of investments differ because it measures risk per unit of return. Which stock is riskiest based on a coefficient of variation analysis?