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 w/ Firm A General Meters Merger w/ Firm B
Possible Earnings ($M) Probability Possible Earnings ($M) Probability
$20 million 0.10 $20 million 0.05
$30 million 0.30 $30 million 0.40
$40 million 0.60 $40 million 0.55
a. Compute the mean, standard deviation, and coefficient of variation for both investments.
b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?