Question

Assume that the historical average return on Canadian common stocks between 1957 and 2019 is 10.29%, with a standard deviation of 16.41%. This tells us that if we bought Canadian stocks during this period, we would expect our returns to be lower than –6.12% or higher than 26.70% in one year out of every

Select one:

a. two.

b. three.

c. four.

d. five.

e. six.

Answer 1

Given about a stock,

expected return u = 10.29%

Standard deviation sd = 16.41%

For a return less than -6.12%, Z is calculated as

Z = (X-u)/sd = (-6.12 - 10.29)/16.41 = -1

So probability of Z less than -1 is 16%

similarly, for a return greater than 26.70%,

Z = (26.70 - 10.29)/16.41 = 1

So, probability of Z greater than 1 is 16%

So, Out of last 100 years, in 32 years our returns is lower than –6.12% or higher than 26.70%.

So, we would expect our returns to be lower than –6.12% or higher than 26.70% in one year out of approx every 3 years.

Option b is correct.