In: Finance
Problem 20-12 Portfolio consideration and risk aversion [LO20-4]
General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation).
General Meters Merger with Firm A |
General Meters Merger with Firm B |
|||||||||||
Possible Earnings ($ in millions) |
Probability | Possible Earnings ($ in millions) |
Probability | |||||||||
$ | 10 | 0.40 | $ | 10 | 0.35 | |||||||
40 | 0.20 | 40 | 0.30 | |||||||||
70 | 0.40 | 70 | 0.35 | |||||||||
a. Compute the mean, standard deviation, and coefficient of variation for both investments. (Do not round intermediate calculations.Enter your answers in millions. Round "Coefficient of variation" to 3 decimal places and "Standard deviation" to 2 decimal places.)
b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?
Merger A
Merger B