In our Big Story in bl.portfolio dated March 3, 2024, we explained how statistical measures, including mean, standard deviation, beta, alpha, and correlation, can be used to make informed investment decisions. However, you would have noticed that successful investors often emphasise risk management as a crucial component of investing because it helps protect their capital from significant losses and ensures long-term sustainability. So, here we present five statistical tools to assess the risks in your portfolio and manage them well.
Coefficient of Variation
By comparing the volatility (represented by the standard deviation of returns) to the average return, the coefficient of variation (CV) provides an assessment of the risk-return relationship inherent in investment decisions. Standard deviation quantifies the extent to which a stock’s price tends to deviate from its average return and can be computed using Excel. A lower CV signifies less dispersion around the average return, indicating lower risk per unit of average return. This metric enables investors to gauge the level of risk relative to the asset’s returns.
While this tool can be applied to an individual’s stock portfolio, it…
