Question

Asked Nov 9, 2019

Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen.

State of the economy |
Return on company A(%) |
Return on company B (%) |

Worse than expected |
7.3% |
-4.7% |

Expected |
11.5% |
5.4% |

Better than expected |
16.6% |
24.3% |

- Calculate the expected rate of return, and standard deviation of each company.
- Critically evaluate the importance of the standard deviation factor in comparing investments.

Step 1

Expected return can be calculated using excel as below:

Step 2

Step 3

Standard&nb...

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