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Problem 20-12 Portfolio consideration and risk aversion [LO20-4] General Meters is considering two mergers. The first...

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

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