A. Using standard deviation alone to compare the risk of different investments can lead to misleading conclusions when the investments have different expected returns as well as different standard deviations.
B. The coefficient of variation is used to measure the risk of securities relative to their expected returns and to compare the risk of one security with the risk of another security or other securities. It is calculated as the standard deviation of the investment divided by the expected return of the investment.
C. Correlation is the term used to describe how the returns of two investments tend to move in respect to each other. The amount of correlation in the returns of any two securities is measured by their correlation coefficient. A correlation coefficient of +1 means that the two securities’ returns have in the past always moved together, in the same direction and to the same extent. A correlation coefficient of -1 means that the two investments’ returns have in the past always moved in exactly opposite directions. A correlation coefficient of 0 means that there has been no historical relationship between the returns of the two securities. The correlation coefficient is not used to compare the risk of one security with the risk of another security, however.
D. The expected return of an investment with a normal distribution is the mean (or average) of the distribution. The expected return is the average of all the possible outcomes, weighted according to their probabilities of occurrence. The expected return is not used to compare the risk of one security with the risk of another security, however.
