Suppose the returns on large-company stocks are normally distributed. Also suppo

Question

Suppose the returns on large-company stocks are normally distributed. Also suppose large-company stocks had an average return of 11.8% and a standard deviation of 20.3%. Use the NORMDIST function in Excel® to answer the following question:

Determine the probability that in any given year you will lose money by investing in common stock. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Suppose the returns on large-company stocks are normally distributed. Also suppose large-company stocks had an average return of 11.8% and a standard deviation of 20.3%. Use the NORMDIST function in Excel® to answer the following question:

Explanation / Answer

Answer :

Normdist function in excel returns the cumulative probability that the observed value of a Normal random variable with mean mu and standard deviation sigma will be less than or equal to x. If cumulative is set to FALSE (or 0, interpreted as FALSE), NORMDIST returns the height of the bell-shaped probability density curve

The NORMDIST parameters, x, mu and sigma, are numeric values, where the parameter, cumulative, is a logical TRUE or FALSE value. Sigma must be greater than 0, but there is no similar requirement for x or mu.

In our case :

mu = 11.8

Sigma = 20.3

True means that we are finding out the probability of zero returns as well as negative returns which both are the case of loosing the complete money.

x = 0 in our case , the value upto which we want to find out the probability

Standaridized value used by NORMSDIST is (x – mu)/sigma.

Normdist (0,11.8, 20.3, True ) = Normsdist(0-11.8/20.3) = 0.2805

so the probability is 28.05 %

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