Quantitative Measure of Financial Risk

C

The coefficient of variation (CV) is a statistical measure used to represent the relative variability or risk of a data set. It is calculated as the ratio of the standard deviation of the data set to its mean. The coefficient of variation is commonly used in finance to analyze the risk of a particular investment or portfolio.

The question asks for the statistic that can be used as a quantitative measure of relative "financial risk." There are two coefficients of variation mentioned in the answer choices: CVEPS and CVEBIT.

CVEPS stands for the coefficient of variation of earnings per share, which is a measure of the variability of a company's earnings per share over a period of time. A higher CVEPS indicates greater volatility in earnings per share, which may be indicative of greater financial risk. Therefore, option A (CVEPS) could be a possible answer.

CVEBIT stands for the coefficient of variation of operating income, which measures the variability of a company's operating income over a period of time. Operating income is a measure of a company's profitability from its core operations. A higher CVEBIT indicates greater volatility in operating income, which could be a sign of greater financial risk. Therefore, option B (CVEBIT) could also be a possible answer.

Option C (CVEPS - CVEBIT) represents the difference between the coefficient of variation of earnings per share and the coefficient of variation of operating income. This measure can be used to compare the volatility of a company's earnings per share to its operating income. However, this does not necessarily provide a more comprehensive or accurate measure of financial risk compared to using CVEPS or CVEBIT alone.

Option D (CVEPS + CVEBIT) represents the sum of the coefficient of variation of earnings per share and the coefficient of variation of operating income. This measure is not commonly used to evaluate financial risk, and therefore, is not a suitable answer.

In conclusion, both option A (CVEPS) and option B (CVEBIT) are valid answers to the question, as they can be used as quantitative measures of relative financial risk.