Question

1. A stock has an expected rate of return of 9.8 percent and a standard deviation of 15.4 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?

   	A.	greater than 0.10
   	B.	less than 0.005
   	C.	between 0.025 and 0.16
   	D.	between 0.005 and 0.025

Answer 1

For computing the probability scenarios, following information is need to be considered

1. Expected rate of return = 9.8%

2. Standard deviation = 15.4 %

3. Mean value = -50%

In the question, half of the value is lost so the lost value is being considered which we called mean.

By using this above information, we compute the Altman Z- score equation. The equation is shown below:

= Mean %- Expected rate of return / Standard deviation

= -50%- 9.8% / 15.4%

= -59.8% / 15.4%
= -3.88%

Thus, the -3.88% value is less than 0.005.

Hence, the option B is correct.