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Coefficient of Variation

Coefficient of variation measures risk per unit of return. Adrian explains its use in this video to choose between competing projects.

To Lease or Not To Lease (Continued)

Coefficient of variation is our solution to the scenario when one project has better expected cash flows but worse variance.

It provides a convenient measure of how much risk is taken on relative to the expected cash flows. In this example, option X offered a higher expected return relative to its risk. So even though it had a lower expectation it is the better project because of its substantially lower risk.

In the next step, we’ll summarise what we have learned so far this week before you start your Test to check your understanding. If you pass the test and have marked each step as complete along the way you’ll be eligible for our free Certificate of Achievement.

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