Question

Treynor Pie Company is a food company specializing in high-calorie snack foods. It is seeking to diversify its food business and lower its risks. It is examining three companies—a gourmet restaurant chain, a baby food company, and a nutritional products firm. Each of these companies can be bought at the same multiple of earnings. The following represents information about all the companies. Company Correlation with Treynor Pie Company Sales ($ millions) Expected Earnings ($ millions) Standard Deviation in Earnings ($ millions) Treynor PieCompany + 1.0 $ 170 $ 8 $ 2.0 Gourmet restaurant + .4 64 8 1.3 Baby food company + .4 53 5 1.8 Nutritionalproducts company − .7 71 6 3.6 a-1. Compute the coefficient of variation for each of the four companies

Answer 1

The coefficient of variation for each of the four companies is:

- Treynor Pie Company = 0.25 (2/8)

- Gourmet restaurant = 0.16 (1.3/8)

- Baby food Company = 0.36 (1.8/5)

- Nutritional products Company = 0.16 (1/6)

Step-by-step explanation:

In finance, the coefficient of variation is a statistical measure that represents the ratio of the standard deviation and the mean of a data series related to the return on investment. It allows investors to determine how much volatility, or risk, is assumed in comparison to the amount of return expected from investments. The lower the ratio of the standard deviation to mean return, the better risk-return trade-off.

Formula: CV=σ/μ

Where:

σ = standard deviation

μ = mean