ISOM 111 L7L8, Fall 2010
1
Homework 3
Due: Tuesday, Oct 19, 12:00pm
Submit to the “ISOM 111 L7L8 Homework Collection Box” outside Room 4351
I.
Company A is considering the acquisition of two separate but large companies, Company B
and Company C, having sales and assets equal to its own. The following table gives the probabilities
of returns for each of the three companies under various economic conditions. The table also gives
the probabilities of returns for each possible combination: Company A plus Company B, and
Company A plus Company C.
Return Distribution for Companies A, B, and C and for Two Possible Acquisitions
Economic
Condition
Probability
Company A
Returns
Company B
Returns
Company C
Returns
Company A+B
Returns
Company A+C
Returns
1
.2
17%
19%
13%
18%
15%
2
.2
15%
17%
11%
16%
13%
3
.2
13%
15%
15%
14%
14%
4
.2
11%
13%
17%
12%
14%
5
.2
9%
11%
19%
10%
14%
(a) For each of Companies A, B and C, ﬁnd the mean return and the standard deviation of returns.
(b) Find the mean return and the standard deviation of returns for the combination of Company
A plus Company B.
(c) Find the mean return and the standard deviation of returns for the combination of Company
A plus Company C.
(d) Compare the mean returns for each of the two possible combinations  Company A plus Com
pany B and Company A plus Company C. Is either mean higher? How do they compare to Company
A’s mean return?
(e) Compare the standard deviation of the returns for each of the two possible combinations 
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 Spring '11
 Hong
 Normal Distribution, Company B, ISOM, patrol car

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