May 09

Coefficient of variation - Practice question (Par 3 difficulty)

by David Harper, CFA, FRM, CIPM

FRM | Quant |

Assume two hedge fund strategies with the following statistics:

  • Fund A showed a mean return of 8% with variance of 0.04 (i.e., variance of periodic returns)
  • Fund B showed a mean return of 12% with variance of 0.09

Question: which fund has a higher coefficient of variation? 

(Gujarati 3.2)

(don't peek until you try)

 

 

 

 

 

 

 

Answer:

They have the same coefficient of variation.

  • Fund A CV = SQRT(0.04)(100)/8% = 250.
  • Fund B CV = SQRT(0.09)(100)/12% = 250.

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