Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 20, Problem 12P
a.
Summary Introduction
To calculate: The mean, standard deviation and coefficient of variation for both investments made by General Meters, that is, with firm A and with Firm B.
Introduction:
Mean:
It is the value estimated or anticipated to be earned in the future from an investment. It is computed by adding up the values obtained after multiplying each outcome with its probability.
Standard deviation (S.D):
A statistical tool that helps measure the deviation or volatility of an investment is termed as standard deviation. It is the square root of variance.
Coefficient of variation ( CoV ):
It is the ratio of SD (standard deviation) to the mean that shows the extent of variability of data in relation to the mean of the population.
b.
Summary Introduction
To determine : The alternative that brings a higher valuation,assuming that the investors are risk averse.
Introduction:
Merger:
An agreement between two existing companies that combines them to form a single company is termed as a merger. This is done for the expansion of business, share in the market, and value of shareholders.
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Wolseley manufacturing Co. invests in a group of risky projects, which increases the unsystematic risk of the firm, but does not change the systematic risk of the firm. All else the same, the expected risk premium on its common stock is most likely to: Select one: a. Increase, because the difference between the expected return on the firm's stock and the risk-free rate will widen. b. Increase or decrease, depending on the internal rate of return of the new projects. c. Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will widen. d. Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will narrow. e. Remain unchanged, because the level of systematic risk is unchanged.
Which of the following statements is true?
Group of answer choices
The Principle of Diversification states that investors are better off by investing in one asset.
The Principle of Diversification states that investors are better off by investing in different types of assets.
The Principle of Diversification states that investors are better off by investing in risk-free assets.
The Principle of Diversification states that investors are better off by investing in an industry of their choice.
Which of the following statements is MOST correct concerning diversification and risk?
Select one:Proper diversification generally results in the elimination of riskOnly wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
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