Question

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

Answer 1