Question

A stock has an annual return of 14 percent and a standard deviation of 62 percent. What is the smallest expected loss over the next year with a probability of 1 percent? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round the z-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places.)

b. Does this number make sense?

• Yes

• No

Answer 1

Prob(R .140 -2.326(.62)) = 1%

Prob(R -1.30212) = 1%

Answer is -130.21%

Note: -2.326 is the Z-score. Z score is a standard normal distribution. Above, P(-2.326 Z 2.326) = .98

.98 is the confidence level or 1% probability on one tail.

b. No, it does not make sense as it is impossible to lose more than 100% in a stock.