# financial return/coefficient of variation

#### ealeql

##### New Member
I am moving this question to this forum from the general statistics one because I just realized this forum covers finance.

I would greatly appreciate it if someone could tell me if I have arrived at the correct answer. Thank you.

Portfolio A has an average 12% return and a standard deviation of 3%, while portfolio B has an average return of 6% with a standard deviation 0f 2%. Which stock portfolio has the higher relative risk?

To solve this I used the coefficient of variation:
Portfolio A: 3%/12% = 25%
Portfolio B: 2%/6% = 33%
Assuming my answers are correct, 25% and 33%, I am not sure what they mean. With coefficient of variation, does it mean the higher the number the more risk/variation. If so the answer is Portfolio B.

a) portfolio A
b) portfolio B
c) there is no way to determine this
d) they are both the same

Thank you

#### Outlier

##### TS Contributor
I think B has higher relative risk.

My primitive strategy is to plot the risk vs. return for several investments and fit a least squares line to the datapoints, and some investments will be away from the line in such a way that they offer better risk/return than the average as represented by the line.
For SD I use a 5 or 10 or 20 year average.

But see
http://en.wikipedia.org/wiki/Modern_portfolio_theory

#### anirban

##### New Member
Ealeql,

Coefficient of Variation of return is most widely used proxy for risk.
You can use your own measures (either):
Another approach: High return % will come at high risk [return = risk free return + risk premium]. risk free return is same for both the portfolios. In this method, you are ignoring variability.