Question 4 (7 points) According to Investment Digest (\"Diversification and the

Question

Question 4 (7 points)

According to Investment Digest ("Diversification and the Risk/Reward Relationship", Winter 1994, 1-3), the mean of the annual return for common stocks from 1926 to 1992 was 16.5%, and the standard deviation of the annual return was 19%.

a. What is the probability that the stock returns are greater than 0%?
b. What is the probability that the stock returns are less than 18%?

Question 4 options:

P(X > 0) = 80.7%; P(X<18) = 53.2%

P(X > 0) = 86.7%; P(X<18) = 53.2%

P(X > 0) = 19.2%; P(X<18) =46.8%

P(X > 0) = 29.7% ; P(X<18) =53.2%

P(X > 0) = 80.7%; P(X<18) = 53.2%

P(X > 0) = 86.7%; P(X<18) = 53.2%

P(X > 0) = 19.2%; P(X<18) =46.8%

P(X > 0) = 29.7% ; P(X<18) =53.2%

Explanation / Answer

mean is 16.5 and SD is 19

a) P(x>0)=P(z>(0-16.5)/19)=P(z>-0.87) or P(z<0.87); From normal distribution table we get 0.8078 or 80.7%

b) P(x<18)=P(z<(18-16.5)/19)=P(z<0.08) from normal table we get 53.2%

thus answer is A

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