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Consider an economy with two types of firms, S and I.

13. Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 60% probability that the firms will have 15% return and a 40% probability that the firms will have a -10% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 20
a. Type S firms?
b. Type I firms?

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a)
Return Probability
15% 0.60
-10% 0.40
Expected Return = 15%*0.6-10%*0.4=0.05 or 5.0%
Standard Deviation = (0.6*(15%-5%)^2+0.4*(-10%-5%)^2)^0.5 =0.1225 or 12.25%

Since correlation between all 1.
The portfolio standard ...

Solution Summary

This post shows how to calculate the volatility (standard deviation) of a portfolio that consists of an equal investment in 20
a. Type S firms?
b. Type I firms?

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