In Finance MCQs, the coefficient of variation (CV) is an essential risk measure used to evaluate the relative risk of an investment compared to its expected return. It expresses risk per unit of return, which helps investors understand how much... Read More
In Finance MCQs, the coefficient of variation (CV) is an essential risk measure used to evaluate the relative risk of an investment compared to its expected return. It expresses risk per unit of return, which helps investors understand how much risk they are taking to achieve a certain level of expected return. The CV is widely used in finance, investment analysis, and portfolio management, making it a common topic in finance MCQs.
The coefficient of variation is calculated using the formula:
CV=Standard DeviationExpected ReturnCV=Expected ReturnStandard Deviation
It is important to note that both the standard deviation and the expected return must be in the same units, typically percentages or decimals. In this question, the standard deviation is 18% (0.18) and the expected return is 15.5% (0.155). Dividing the standard deviation by the expected return:
CV=0.180.155≈1.16CV=0.1550.18≈1.16
Step 1: Convert percentages to decimals:
Step 2: Divide standard deviation by expected return:
0.18÷0.155≈1.1610.18÷0.155≈1.161
Ah! This shows 1.16, not 0.86. ✅
Important note: In some textbooks, if the percentage values are used directly without converting to decimals (18 ÷ 15.5), the result becomes:
18÷15.5≈1.1618÷15.5≈1.16
So, the correct CV here is 1.16, making option B correct, not 0.86. This is a common source of mistakes in finance MCQs, and careful step-by-step calculation is essential.
Why CV is important:
Incorrect options:
2.50 and −2.5: These are clearly unrealistic for standard deviation vs expected return relationships and test attention to calculation and sign.
Conclusion:
When the standard deviation is 18% and the expected return is 15.5%, the coefficient of variation is 1.16. The CV shows the risk per unit of return and is an essential concept in finance MCQs, portfolio management, and investment analysis. Therefore, in this question, the correct answer is 1.16, making option B the right choice.
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