What happens when there are two distributions
with different expected returns? How do you decide
which distribution involves greater dispersion
and thus greater risk? For example, suppose you
are presented with two investment strategies.
| |
Plan A |
Plan B |
Expected return |
15% |
20% |
Standard deviation |
5% |
6% |
Coefficient of
variation |
.333 |
.300 |
Plan A offers a lower expected return, but with
less variability, than Plan B. Which is less risky?
Actually, Plan B has less relative risk. The coefficient
of variation -- that is, the ratio of variability
to return -- is higher for Plan A (5/15 = .33)
compared to Plan B (6/20 = .30). There is greater
relative risk that returns will deviate from the
expected return under Plan A. |
2.2.4 Normal Distribution
