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Memphic Memphic
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6 years ago
Consider a portfolio that consists of an equal investment in 20 firms. For each of these firms, there is a 70% probability that the firms will have a 16% return and a 30% that they will have a -8% return. Each of these firms' returns is independent of all others. The standard deviation of this portfolio is closest to:
A) 2.5%
B) 4.2%
C) 8.8%
D) 11.0%
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
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#1
6 years ago
A
Explanation:  A) E[return] = (.70)(16%) + (.30)(-8%) = 8.8%
SD(Rt) =   = 10.9982%
SD(Rportfolio) =   = 2.459268%
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