Question

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
$	40			0.40			$	40			0.35
	60			0.50				60			0.60
	80			0.10				80			0.05

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?
  

Answer 1

Answer 1

Expected Return		54		54
Standard Deviation		12.81		11.14
Coefficient of variation (SD/Mean * 100)		23.715		20.621

Expected Return =∑( Probability * Return ) and Standard Deviation =

Coefficient of varioation = SD/Mean * 100

Excel formula

Result

Answer 2 If investors are risk averse they should go for option B as the variation (measured by coefficient of Variation) is lower in case of alternative B