US CMA Part 2 · Chapter 3 · Question 3 of 15
Investment A has an expected return of 12% and a standard deviation of 9%. Investment B has an expected return of 8% and a standard deviation of 5%. Using the coefficient of variation, which statement is correct?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) B has less risk per unit of expected return (CV 0.625 versus 0.75 for A)
Explanation
Coefficient of variation = standard deviation / expected return. A: 9% / 12% = 0.75. B: 5% / 8% = 0.625. The lower CV means B carries less risk per unit of expected return. The ratio must be standard deviation divided by expected return, not the inverse.
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