Question

Jennifer creates a portfolio of stocks by investing in ABC, Inc. and XYZ, Inc an equal proportion of money. The portfolio has a mean rate of return of 1% per week and a standard deviation of 2.50% per week. How much is the probability that the portfolio’s return can be -2% in one week? How much is the probability that the stock’s return can go up to 3% in one week? Assume normal distribution of portfolio returns. What happens if the stock’s volatility rises to 3%? What happens if the stock’s volatility declines to 1%?

Answer 1

How much is the probability that the portfolio’s return can be -2% in one week?
=1-NORMDIST(-2%,1%,2.50%,TRUE)=0.88493033

How much is the probability that the stock’s return can go up to 3% in one week?
=1-NORMDIST(3%,1%,2.50%,TRUE)=0.211855399

Assume normal distribution of portfolio returns.

What happens if the stock’s volatility rises to 3%?
How much is the probability that the portfolio’s return can be -2% in one week?
=1-NORMDIST(-2%,1%,3.0%,TRUE)=0.841344746

How much is the probability that the stock’s return can go up to 3% in one week?
=1-NORMDIST(3%,1%,3.0%,TRUE)=0.252492538

What happens if the stock’s volatility declines to 1%?
How much is the probability that the portfolio’s return can be -2% in one week?
=1-NORMDIST(-2%,1%,1.0%,TRUE)=0.998650102

How much is the probability that the stock’s return can go up to 3% in one week?
=1-NORMDIST(3%,1%,1.0%,TRUE)=0.022750132