Question

1 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. Correlation with Treynor Pic Company Sales (5 millions) Expected Earnings (5 millions) ta Company Treynor Pie Company Gourmet restaurant Baby food company Nutritional products company Standard Deviation in Earnings (5 millions) $ 4.0 66 57 29 1.7 eBook 0-1. Compute the coefficient of variation for each of the four companies. (Enter your answers in millions (e.g. $100,000 should be entered as "10"). Round your answers to 3 decimal places.) Coefficient of Variation Treynor Pie Company Gourmet restaurant Baby food company Nutritional products company 3-2. Which company is the least nisky Nutritional products company Treynor Ple Company Baby food company O Gourmet restaurant

Answer 1

Answer 1:

Coefficient of variation = Standard deviation / expected earning

Company	Coefficient of variation = Standard deviation / expected earning	Coefficient of variation
Treynor Pie company	4/10	0.4
Gourmet Restaurant	1.3/6	0.217
Baby food Company	1.7/3	0.567
Nutritional products Company	3.4/4	0.85

Standard deviation is a measure of risk that an investment will not meet the expected return in a given period. The smaller an investment's standard deviation, the less volatile and hence risky the business will be. The larger the standard deviation, the more dispersed those returns are and thus the business will be riskier.

Answer 2:

Since the standard deviation of Gourmet restaurant is less amongst the given businesses, hence it is least risky.

Answer 3a:

Treynor Pie Company with the highest standard deviation is the most risky.

Answer 3b:

Treynor Pie Company’s risk can be reduced if it acquires the Gourmet restaurant as the standard deviation of this company is very less and it is least risky.