Coefficient of Variation (CV) Explained: A Guide for Australian Investors

When it comes to investment decisions, Australians are always on the lookout for smarter, more insightful ways to weigh up options. Enter the Coefficient of Variation (CV) – a statistical tool that packs a punch when comparing the risk and return of different investments. In a year marked by market volatility and evolving investment products, understanding CV could be your secret weapon for portfolio success.

What is the Coefficient of Variation and Why Does it Matter?

The Coefficient of Variation is a ratio that measures the relative risk (volatility) per unit of expected return. It’s calculated by dividing the standard deviation of returns by the mean (average) return, then multiplying by 100 to express as a percentage. Simply put, the lower the CV, the better the risk-return trade-off.

• Standard deviation: A measure of how much returns deviate from the average.

• Mean return: The average return of the investment over a period.

• CV formula: (Standard Deviation / Mean Return) × 100

While the Sharpe Ratio and other metrics are often used to compare investments, CV stands out for its ability to compare assets with different units, scales, or expected returns—making it invaluable for everyday investors juggling shares, ETFs, property trusts, and more.

How CV is Used in the 2025 Australian Market

With 2025 bringing new financial products, regulatory tweaks, and ongoing inflationary pressures, CV is more relevant than ever. For example, let’s say you’re comparing an ASX-listed technology ETF with an average annual return of 8% and a standard deviation of 10%, against a government bond ETF with a 3% return and 2% standard deviation:

• Tech ETF CV: (10 / 8) × 100 = 125%

• Bond ETF CV: (2 / 3) × 100 = 66.7%

Despite the tech ETF’s higher average return, its CV reveals that you’re taking on almost double the risk for each unit of return compared to the bond ETF. In a market where RBA interest rate policy and global shocks can quickly change the landscape, CV provides a clear, apples-to-apples view of relative risk.

Notably, with ASIC’s increased focus on risk disclosure in 2025, more managed funds and superannuation providers are including CV in their risk metrics, helping retail investors make more informed choices.

Practical Applications: Portfolio Diversification and Beyond

CV isn’t just for comparing single investments. It’s a powerful tool for portfolio construction and ongoing risk management. Here’s how Australians are using it in practice this year:

• Diversification: By calculating CV for each asset in a portfolio, investors can balance high-return, high-risk assets with lower-risk options, optimising for a more stable overall return.

• Evaluating New Products: With the rapid growth of green bonds, crypto ETFs, and alternative assets in 2025, CV helps compare these newer products against traditional options, factoring in volatility that isn’t always obvious at first glance.

• Superannuation Strategy: Many super funds now publish CV figures for their investment options, making it easier to align your retirement savings with your risk appetite and life stage.

It’s worth noting that CV is most effective when comparing investments with positive mean returns. For assets with negative or near-zero average returns, CV can produce misleading results—so context is key.

Limitations and the Future of CV in Australian Investing

No metric is perfect, and the CV is no exception. It assumes that risk is best measured by standard deviation, which may not capture all the nuances of real-world investment risk (such as liquidity risk or tail events). Additionally, CV may not be suitable for comparing assets with very different return distributions or when mean returns are close to zero.

Still, in 2025’s data-driven investing environment, the CV is gaining traction among both retail and professional investors. Expect to see it more frequently in product disclosure statements, robo-advisor dashboards, and even super fund comparison tools as Australians demand clearer, more actionable risk information.