Treynor Pie Co. is a food company specializing in high-caloric snack foods. It is seeking to diversify its food buisness 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 Pie Company |
+1.0 |
$126 |
$10 |
$4.0 |
| Gourmet restaurant |
+0.4 |
$63 |
$9 |
$1.4 |
| Baby Food Company |
+0.3 |
$52 |
$5 |
$1.6 |
| Nutritional Products Company |
-0.7 |
$77 |
$7 |
$3.2 |
A. Using the last two colums, compute the coefficient of variation for each of the four companies. Which company is the least risky? Which company is the most risky?
B. Discuss which of the acquisition candidates is the most likely to reduce Treynor Pie Company's risk? Explain Why.