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.
(a) What is the expected return for an individual firm?
(1) 14% (2) 3% (3) 5% (4) -5%
(b) The standard deviation for the return on an individual firm is closest to:
(1) 23% (2) 5.25% (3) 15% (4) 10%
(c) The standard deviation for the return on an equally-weighted portfolio of 20 S firms is closest to:
(1) 5.1% (2) 23% (3) 15% (4) 5.25%
(d) The standard deviation for the return on an equally-weighted portfolio of 20 I firms is closest to:
(1) 5.25% (2) 5.1% (3) 15% (4) 23%