Question

an investment you're considering has an expected return of 8% and a standard deviation of 6%. the stock is expected to pay dividens of $0.50 per share over the comming year. What is the approximate probability that you will earn over 20% on your investment in the coming year?

Answer #1

Below is the normal distribution curve of standard deviation:

As per this curve,

- There is
**50% probability**that the investment will give return**above**the expected return- Expected return =
**8%**

- Expected return =
- There is
**15.9% probability**that the investment will give return**above**the expected return + standard deviation- Expected return + Standard deviation = 8% + 6%
**= 14%**

- Expected return + Standard deviation = 8% + 6%
- And there is
**2.3% probability**that the investment will give return**above**the expected return + 2 times standard deviation- Expected return + Standard deviation = 8% + (2 * 6%)
**= 20%**

- Expected return + Standard deviation = 8% + (2 * 6%)

**Hence, there is 2.3% probability that the investment
will give return over 20% in the coming year.**

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