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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.
-What is the expected return for an individual firm?

Question

Quizplus · Accepted Answer

To find the expected return for an individual firm, we need to calculate the weighted average of the returns based on their probabilities.

For both S and I firms, there is a 70% chance of a 20% return and a 30% chance of a -30% return. Therefore, the expected return for each individual firm can be calculated as:

(0.7 x 0.2) + (0.3 x -0.3) = 0.14 - 0.09 = 0.05 or 5%

So, the best choice is B) 5% as it represents the expected return for an individual firm in the given economy.

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