Diversification in Stock Portfolios

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 45% probability that the firm will have a 7% return and a 55% probability that the firm will have a -18% return. What is thevolatility (standard deviation)of a portfolio that consists of an equal investment in:

1. 32 firms of type S? Standard deviation isAnswer ------

%. (Round to two decimal points.)

1. 32 firms of type I? Standard deviation isAnswer -----

%. (Round to two decimal points.)