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
$	45			0.20			$	45			0.15
	50			0.20				50			0.30
	55			0.60				55			0.55

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.)

	Merger A Merger B Mean Standard deviation Coefficient of variation

b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?

• Merger A

• Merger B

Answer 1

b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?

Merger B

a risk averse investor would choose a project whose Standard Deviation is lower

Please dont forget to upvote