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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

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

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