Standard deviation and coefficient of variation - part 2

In this lesson

1. 0:00 Introduction to product A NPV analysis
2. 1:01 Calculating standard deviation with probabilities
3. 3:18 Interpreting standard deviation and investment risk
4. 5:03 Why coefficient of variation matters
5. 6:01 Comparing projects using coefficient of variation
6. 7:47 Excalibur PLC investment selection case study

About this lesson

You'll discover why standard deviation alone can be misleading when comparing projects of different sizes, and how the coefficient of variation gives you a fairer way to assess relative risk across investments. The lesson walks through a practical example where a company is evaluating a new product launch with uncertain demand. You'll see how to calculate the mean return (expected value) from a probability distribution, then use that to work out the standard deviation—a key measure of how spread out the possible outcomes are. The worked example shows that while a standard deviation of 983 tells you the returns will typically fall within a certain range around the expected value of 4,210, this figure only makes sense when you're comparing it to other projects. This is where the coefficient of variation becomes essential. By dividing standard deviation by expected value, you get a relative risk measure that works across projects of any size. The lesson demonstrates this with a comparison: two projects might have very different standard deviations, but the one with the higher absolute spread could actually be less risky if its expected value is proportionally larger. A final worked example with five investment projects shows you how to apply this thinking in a real decision-making scenario, helping you choose the lowest-risk investment based on sound financial analysis.

Duration: 10m