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27 March, 00:46

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 20% probability that they

will have a 20% return and a 80% probability that they will have a - 30% return.

What is the expected return for an individual firm?

A) - 12%

B) - 20%

C) 10%

D) 20%

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Answers (1)
  1. 27 March, 02:02
    0
    option (B) - 20%

    Explanation:

    Data provided in the question:

    Return Probability

    20% 20%

    -30% 80%

    Now,

    Expected return for an individual firm = ∑ (Return * Probability)

    or

    Expected return for an individual firm = (0.20 * 0.20) + (-0.30 * 0.80)

    or

    Expected return for an individual firm = 0.04 + ( - 0.24)

    or

    Expected return for an individual firm = - 0.2

    or

    Expected return for an individual firm = - 20%

    Hence,

    The correct answer is option (B) - 20%
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