Question

Calculating the coefficient of variation on an investment that will generate 30% return will be 10%. While the returns will be -25 if the economy slips. Calculate the coefficient of variation of the investment.

Answer 1

The coefficient of variation (CV) is a measure of the relative risk or volatility of an investment in comparison to its expected return. It is calculated by dividing the standard deviation of the investment's returns by its expected return and multiplying by 100 to express the result as a percentage.

Step-by-step explanation:

The coefficient of variation (CV) is a measure of the relative risk or volatility of an investment in comparison to its expected return. It is calculated by dividing the standard deviation of the investment's returns by its expected return and multiplying by 100 to express the result as a percentage.

In this case, the investment is expected to generate a 30% return with a coefficient of variation of 10%. The coefficient of variation can be calculated by dividing the standard deviation by the expected return and multiplying by 100. Let's assume the standard deviation is represented by the symbol σ.

The formula to calculate the coefficient of variation is:

CV = (σ / expected return) * 100

Substituting the values given in the question, we have:

10 = (σ / 30) * 100

Now we can solve for σ.

σ = (10 * 30) / 100 = 3

Therefore, the coefficient of variation of the investment is 3.