Coefficient of variation is a better risk calculator

Question

Elaborate the statement: Coefficient of variation is a better risk calculator to use than the standard deviation when estimating the risk of capital budgeting projects.

Answer 1

a) The variation coefficient is a better risk calculator than the standard deviation because the CV varies according to the size of the project. CV calculates the standard deviation divided by the mean and hence puts the standard deviation into the situation.

b) For instance, a standard deviation of .05 could be considered big relative to a mean of .02 but it would be considered a small value compared to a mean value of 8.