Annual returns on stock of the Mean Corporation are approximately normally distr

Question

Annual returns on stock of the Mean Corporation are approximately normally distributed with a mean of 13.8% and standard deviation of 4.1%. Joe Prudent is considering investing in the Mean Corporation. According to his investment strategy, he will only invest if the chance of an annual return of 12% or more is greater than 65%.

In answering the following question, you may find this standard normal table useful.

a)Calculate the corresponding standardized value (z) for an annual return of 12%. Give your answer to 2 decimal places.

z =

b)Therefore, according to his investment strategy, Joe:

will invest in Mean Corporation
will not invest in Mean Corporation
is indifferent to investing in Mean Corporation

Explanation / Answer

Z score = 12 - 13.8/4.1 = -0.4390243902439024 This Z sccore translates to about 40% probability of defect, hence, will not invest in Mean Corporation.

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