What is a better measure of risk if assets have different expected returns:
(1) the standard deviation or
(2) the coefficient of variation? Why?
Standard deviations can measure the probability that a value will fall within a certain range. For normal distributions, 68% of all values will fall within 1 standard deviation of the mean, 95% of all values will fall within 2 standard deviations, and 99.7% of all values will fall within 3 standard deviations. The coefficient of variation is a better measure of risk, quantifying the dispersion of an asset’s returns in relation to the expected return, and, thus, the relative risk of the investment. Hence, the coefficient of variation allows the comparison of different investments.