Assume the returns from holding small-company stocks are normally distributed. A
ID: 2787958 • Letter: A
Question
Assume the returns from holding small-company stocks are normally distributed. Also assume the average annual return for holding the small-company stocks for a period of time was 17 percent and the standard deviation of those stocks for the period was 34.9 percent. Use the NORMDIST function in Excel® to answer the following questions. What is the approximate probability that your money will double in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal places, e.g., 32.161.) Probability % What is the approximate probability that your money will triple in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 8 decimal places, e.g., 32.16161616.) Probability %
Explanation / Answer
Here average Return(x)= 17% i.e., 0.17
Standard deviation( Sd)= 34.9% i.e., 0.349
To stanadardise the random variable (x) we have :
Z= x-u/ sd
Case 1: Money will double in value in a single year Return = 100% i.e., 1.00
Z= 17-100/34.90= -2.37822
Using Command =NORMSDIST(-2.37822)
we get the probability of0.008698
Therefore Probability of getting money double in a single year is 0.087 appx
Case 2:Money will be triple in a single year i.e., Return will be 200% or 2
To stanadardise the random variable (x) we have :
Z= x-u/ sd
Z= 17-200/34.90= -5.24355
Using Command =NORMSDIST(-5.24355)
we get the probability of 0.001( appx.)
Therefore Probability of getting money triple in a single year is 0.001 appx