You Are a Financial Analyst for General Motors and Have

Essay

You are a financial analyst for General Motors and have been asked to evaluate the effect on risk of taking over RandomTech,an electronics firm.You have collected the following data for both firms:
$\begin{array} { lcc } &\underline{ \text { GM }} &\underline{ \text { RandomTech} } \\\text { share price } & \$ 60 & \$ 20 \\\text { number of shares } & 13.25 \text { million } & 10 \text { million } \\\text { beta } & 1.0 & 2.0 \\\text { standard deviation } & 20 \% & 80 \%\end{array}$

You estimate the correlation of returns between GM and RandomTech to be 0.3.
a. How will taking over RandomTech affect GM's beta?
b. What will the variance of the combined firm be if the takeover is carried through?