Question

The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 10% (i.e. an average gain of 10%) with a standard deviation of 31.5%. A return of 0% means the value of the portfolio doesnt change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money.

(a) What percent of years does this portfolio lose money, i.e. have a return less than 0%?
(b) What percent of years does this portfolio return more than 8%?
(c) What percent of years does this portfolio return between 10% and 35%?
(d) What is the cutoff for the highest 81% of annual returns with this portfolio?

Answer 1