Certified Management Accountant 2026 – 400 Free Practice Questions to Pass the Exam

The coefficient of variation is a vital measurement used to assess an investment's return relative to its overall risk. It is calculated by dividing the standard deviation of the investment's returns by the mean return. This ratio allows investors to compare the degree of variation in investment returns relative to the expected return, providing a standardized way to gauge risk.

A key advantage of the coefficient of variation is that it enables comparisons between different investments with varying expected returns. For instance, if one investment has a higher mean return but also a higher standard deviation, the coefficient of variation will help determine if the investment justifies its risk compared to another with a lower return but also lower risk. Thus, it offers insights into how well the investment performs relative to the level of risk incurred.

In contrast, while mean return reflects the average performance, it does not account for the variability or risk associated with that return. Standard deviation measures the extent of variability in return, but it does not provide a clear perspective on its relationship with the expected return. The market risk premium indicates the additional return expected from an investment in the market over a risk-free rate but does not directly assess the risk perspective in relation to the investment’s return in the manner that the coefficient of variation does.