SOLUTION: According to Investment Digest ("Diversification and the Risk/Reward Relationship", Winter 1994, 1-3), the mean of the annual return for common stocks from 1926 to 1992 was 12.4%,

Question 202575: According to Investment Digest ("Diversification and the Risk/Reward Relationship", Winter 1994, 1-3), the mean of the annual return for common stocks from 1926 to 1992 was 12.4%, and the standard deviation of the annual return was 20.6%. The article claims that the distributions of annual returns for both common stocks is approximately bell-shaped and symmetric.. Assume that the distribution is normally distributed with a mean and standard deviation given above.
Find the probability that the return for common stocks will be
a. Greater than 0%
b. Greater than 10%
c. Greater than 20%
d. Less than -10%

Answer by stanbon(75887) (Show Source): You can put this solution on YOUR website!
According to Investment Digest ("Diversification and the Risk/Reward Relationship", Winter 1994, 1-3), the mean of the annual return for common stocks from 1926 to 1992 was 12.4%, and the standard deviation of the annual return was 20.6%. The article claims that the distributions of annual returns for both common stocks is approximately bell-shaped and symmetric.. Assume that the distribution is normally distributed with a mean and standard deviation given above.
Find the probability that the return for common stocks will be
a. Greater than 0%
z(0) = (0-0.124)/0.206 = -0.60194...
P(x>0) = P(z>-0.60194...) = 0.7264
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b. Greater than 10%
Same procedure:
Ans: 0.5464
---------------------
c. Greater than 20%
Ans: 0.3561
----------------------
d. Less than -10%
Ans: 0.1280
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Cheers,
Stan H.

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