Question

The expected rate of return for the stock of Cornhusker Enterprises is 0.18 , with a variance equal to of 0.0025, What is the probability that your expected return will be between 0.28 and 0.08?

Answer 1

As per the normal distribution, with mean = 0 and standard distribution = 1, all the data will be within 68% probability, and 95% probability that it is within standard distribution of 2, and 99% probability that it is within standard distribution of 3.

Here, expected return = 0.18

Variance = 0.0025 i.e. standard distribution =SQRT of 0.0025 = 0.05

Putting it in a normal distribution format,

For expected return between 0.28 to 0.08

0.18 + 2(0.05) to 0.18 – 2(0.05)

It is clear that 0.28 to 0.08 is within the 2 standard distribution, so it will lie within 95% probability