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Coefficient of variation

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Treynor Pie Co. 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 the companies.

Company Correlation
with Treynor
Pie Company Sales
($ millions) Expected
($ millions) Standard
in Earnings
($ millions)
Treynor Pie Company............. +1.0 $100 $8 $2.0
Gourmet restaurant............. + .6 60 6 1.2
Baby food company............ + .2 50 4 1.8
Nutritional products company.. - .7 70 5 3.4

a. Using the last two columns, 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 most likely to reduce Treynor Pie Company's risk? Explain why.

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