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

question 41

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 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return. The standard deviation for the return on a portfolio of 20 type I firms is closest to ________.

• A) 0.00%
• B) 12.25%
• C) 5.48%
• D) 24.49%

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