Problem 5-10 The continuously compounded annual return on a stock is normally di
ID: 2819020 • Letter: P
Question
Problem 5-10
The continuously compounded annual return on a stock is normally distributed with a mean of 25% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values? Hint: Refer Figure 5.3.
rev: 09_14_2016_QC_CS-61156, 09_27_2017_QC_CS-102566, 10_24_2017_QC_CS-106301
–35.0% and 85.0%
25.0% and 85.0%
–65.0% and 115.0%
–5.0% and 55.0%
The continuously compounded annual return on a stock is normally distributed with a mean of 25% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values? Hint: Refer Figure 5.3.
Explanation / Answer
95.44% confidence lies within 2 standard deviation, which means
Range of returns = Mean + / - 2 x Std. Dev.
= 25% + / - 2 x 30%
= -35% and 85%