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
	$ 50			.50				$ 50			.45
	55			.20				55			.30
	60			.30				60			.25

Compute the mean, standard deviation, and coefficient of variation for both investments.

	Merger A Merger B Mean Standard deviation Coefficient of variation

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

	Merger A
	Merger B

Answer 1

for firm A :

P(x) 0.50 0.20 0.30 XP(x) 25.00 11.00 18.00 54.0000 x2P(x) 1250.00 605.00 1080.00 2935.00 50 60 total 2xP(x) = 2x2P(x) = E(x) - E(x2) Var(x)-02 E(x2)-(E(x))2= std deviation σνσ2- 54.000 2935.00 19.00 4.359

for firm B:

P(x) 0.45 0.30 0.25 XP(x) 22.50 16.50 15.00 54.0000 x2P(x) 1125.00 907.50 900.00 2932.50 50 60 total ExP(x) 2x2P(x) = E(x) - E(x2) Var(x)-02 E(x2)-(E(x))2= std deviation σνσ2- 54.000 2932.50 16.50 4.062

	merger A	merger B
mean	54	54.000
std deviation	4.359	4.062
coeff of variation	8.07%	7.52%

as COV for merger B is low ; meger B

( please revert number of decimal places required as well weather coeff of variation is required in decimal or percentage if any of above comes wrong)