Question

Suppose the returns on Asset Y are normally distributed. The average annual return for this asset over 50 years was 13.4 percent and the standard deviation of the returns was 23.5 percent. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to determine the probability that in any given year you will lose money by investing in common stock.

What is the probablility of a return less than zero percent for Asset Y?

Multiple Choice

• 28.43%

• 3.97%

• 29.85%

• 27.01%

• 29.57%

What is the probablility of a return less than zero percent for Asset Y?

Answer 1

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Answer:

x = critical value = 0
u = mean = 13.4   
          
s = standard deviation = 23.5   
          
Thus,          
          
z = (x - u) / s = -0.57021

Thus, using a table/technology, the left tailed area of this is  

P(z <   -0.57021) = 28.43%