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Coefficient of Variation - Relative Standard Deviation

by The trader, 1053 days ago
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Coefficient of Variation (CV) is a measure of the dispersion of points/prices around the mean (Dispersion of a probability distribution).

In statistics, the coefficient of variation is also called variation coefficient, unitized risk or relative standard deviation (%RSD). Because its value is normalized and it is a dimensionless number, it is very helpful in analyzing and comparing volatility of different stocks.

CV is expressed in percentage and its value is always positive. It is calculated by taking the standard deviation of N-past prices and then dividing them by the absolute value of the mean (of these N-past prices).

One the main advantage of using the coefficient of variation over the standard deviation to measure volatility is the fact that CV is normalized and can be used to directly compare different asset's volatility. The standard deviation must be used in the context of the mean of the data.
The main disadvantage is that the coefficient becomes very sensitive to small variation of the mean when the latter is close to zero. This means that this trading indicator is not suited to measure the volatility of penny stocks.

As with the standard deviation, the coefficient of variation function has two arguments. The first one gets a time-series (Example: Close price) and the second one gets a lookback period (Number of past bars to use when calculating the mean and the standard deviation).


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