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an investment you're considering has an expected return of 8% and a standard deviation of 6%....

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?

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

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

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