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 firm will have a 15 % return and a 40 % probability that the firm will have a negative 10 % return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in:

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Business

Victor York

7 October, 18:27

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 firm will have a 15 % return and a 40 % probability that the firm will have a negative 10 % return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in:

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Abram Kramer · Answer 1

23%

Explanation:

Base on the scenario been described in the question, we can use following method to solve the given problem

The computation is shown below:

computing the standard deviation first we have to find out the variance which is shown below:

Variance = 70% * (0.20 - 0.05) ^2 + 30% * (-0.30 - 0.05) ^2

= 0.0525

Now

Standard Deviation is

= (0.0525) ^ (1 : 2)

= 23%