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11 stock has an expected return (mean) of 12%, and a standard deviation of 8%. Assume...

11

stock has an expected return (mean) of 12%, and a standard deviation of 8%. Assume that XYZ’s returns are normally distributed. What is the probability that XYZ will produce a return between -4% and 28%?
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Answer #1

= standard deviation of returns

= mean of returns

z (at X=-4%) = (-4-12)/8 = -2

z (at X=28%) = (28-12)/8 = 2

From the z-table, value at z=2 is 0.9772 (z-table for negative z-score) and at z=-2 is 0.0228 (z-table for positive z-score)

From the z-table, the area under the normal distribution = 0.9772-0.0228 = 0.9544

Hence the probability that the stock will produced a return between -4% and 28% is 0.9544.

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