When comparing the riskiness of investments with different expected returns, one must use ________.
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A. B. C. D. E.C
The coefficient of variation equals the ratio of the standard deviation to the mean. Thus, it standardizes the variation in the returns in terms of the expected values.
When comparing the riskiness of investments with different expected returns, the most appropriate measure to use is the coefficient of variation. The coefficient of variation (CV) is a statistical measure that expresses the relative variability of a set of data points when the means are different. It allows for the comparison of the riskiness of investments with varying expected returns.
To understand why the coefficient of variation is the suitable measure, let's briefly explain the other options:
A. None of these answers: This option implies that there is no specific measure to use, which is incorrect. There are specific measures available to compare riskiness.
B. Skewness: Skewness is a measure of the asymmetry of a probability distribution. It indicates whether the distribution is skewed to the left (negative skewness) or to the right (positive skewness). While skewness provides information about the shape of the distribution, it does not directly compare the riskiness of investments with different expected returns.
D. Standard Deviation: The standard deviation measures the dispersion or variability of a set of data points around the mean. It provides a measure of the total risk or volatility of an investment. However, the standard deviation alone does not account for the differences in expected returns. Two investments with different expected returns but the same standard deviation may have different risk levels.
E. Kurtosis: Kurtosis measures the degree of peakedness or flatness of a probability distribution relative to a normal distribution. It provides information about the tails of the distribution. Like skewness, kurtosis does not directly compare the riskiness of investments with different expected returns.
C. The coefficient of variation: The coefficient of variation is calculated by dividing the standard deviation of a set of data by its mean and expressing it as a percentage. It measures the relative risk per unit of return. The coefficient of variation allows for the comparison of investments with different expected returns by considering both their risk (standard deviation) and expected return (mean).
By using the coefficient of variation, investors can assess the risk-adjusted returns of different investments. A lower coefficient of variation indicates a more favorable risk-return tradeoff, as it suggests lower risk per unit of return. Therefore, C. the coefficient of variation is the appropriate measure for comparing the riskiness of investments with different expected returns.