CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns
An analyst compares two funds with very different average returns and wants a dispersion measure that allows a fair comparison of risk per unit of return. Which measure is most appropriate?
The coefficient of variation is the most appropriate measure. It divides standard deviation by the mean return, giving risk per unit of return. Range and mean absolute deviation are absolute measures that depend on the scale of the returns, so they do not allow a fair comparison.
- ARange
- BCoefficient of variationCorrect
- CMean absolute deviation
Explanation
The coefficient of variation divides the standard deviation by the mean, so it expresses risk per unit of return and is unitless. The range and mean absolute deviation are absolute measures that are affected by the scale of returns, so they are poor for comparing funds with different means.
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