Consider an Economy with Two Types of Firms, S and I

question 79

Multiple Choice

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 firms 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 portfolio of 20 type S firms is closest to ________.

• A) 13.75%
• B) 22.91%
• C) 5.00%
• D) 4.58%

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Definitions:

Drive Reduction

A motivation theory that suggests behavior is motivated by the desire to reduce internal drives of tension or arousal that arise from unmet needs.

Pleasure Principle

A psychoanalytic concept suggesting that individuals seek pleasure and avoid pain to satisfy their biological and psychological needs.

Optimal Arousal

A theory suggesting there is a level of arousal that is ideal for facilitating optimal performance on a task or activity.

Incentives

Rewards or stimuli that motivate individuals to perform actions or behaviors, often used to encourage desired outcomes.