Coefficient of Variation (CV)
Candlefocus EditorThe CV is often used in finance to compare the degree of risk associated with different investments relative to their expected return. The lower the ratio of the standard deviation to the mean return, the better the risk-return tradeoff for the investor.
The CV is also used in everyday life for applications such as actuarial science, medicine, quality control and engineering to compare the performance and reliability of different data sets. For instance, quality control professionals may use the CV to compare the performance of different machines in a production process. A low CV would indicate that the machines are all performing at similar levels of variability, whereas a high CV would suggest that the machines are performing differently and that further investigation is necessary.
In statistics, the CV is a way of crowning the degree of variation, or lack thereof, that is present in a data set. A low CV (below 0.10) indicates that most of the data points fall within a narrow range, while a high CV (above 0.20) suggests a wide range of variability. A higher CV indicates a greater risk associated with the data set and implies that further investigation may be necessary.
Overall, the Coefficient of Variation is a useful tool for measuring the dispersion of data points around the mean and comparing those levels of dispersion across different data sets. It is particularly useful in the realm of finance and economics, where investors and analysts use it to gauge the level of risk associated with different investments, as well as in everyday life for applications such as actuarial science, medicine, quality control, and engineering. A low CV indicates a better risk-return tradeoff for the investor, and a high CV indicates that further investigation is necessary.