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Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-The standard deviation for the return on an individual firm is closest to:
A)23.0%.
B)5.25%.
C)15.0%.
D)10.0%.

Question

Quizplus · Accepted Answer

The standard deviation for the return on an individual firm is closest to 23.0%. This is because the standard deviation is the square root of the variance, and the variance is the expected value of the squared deviation from the mean. The mean return for a firm is 20% * 0.7 + (-30%) * 0.3 = 2%. The variance is (20% - 2%)^2 * 0.7 + (-30% - 2%)^2 * 0.3 = 0.00525. The standard deviation is the square root of 0.00525, which is 0.0725, or 7.25%.

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