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Consider an economy with two types of firms, S and U. S firms always move together, but U 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 individual firm is closest to?

Question

Quizplus · Accepted Answer

The standard deviation is calculated using the formula for a discrete probability distribution: σ = √[Σ(p(x) * (x - μ)²)]. Here, μ = (0.7 * 0.2) + (0.3 * -0.3) = 0.07. Then, σ = √[(0.7 * (0.2 - 0.07)²) + (0.3 * (-0.3 - 0.07)²)] ≈ 23.0%.

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