According to Investment Digest (\"Diversification and the Risk/Reward Relationsh
ID: 3175836 • Letter: A
Question
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 16.5%, and the standard deviation of the annual return was 19%. In later parts of the question we will ask: a. What is the probability that the stock returns are greater than 0%? b. What is the probability that the stock returns are less than 18%? For this part, answer the following question: What is the value of the test statistic (Z, t, or F) for each part? (Round to 2 decimal digits)
Question options:
-0.87 in part a, -0.06 in part b
-0.67 in part a, 0.06 in part b
-0.87 in part a, 0.08 in part b
0.67 in part a, 0.08 in part b
Explanation / Answer
mean=16.5%
standard deviation(sd)=19%
a)the probability that the stock returns are greater than 0%
=(X-mean)/sd
=(0-16.5)/19
=-16.5/19
=-0.8684
=-0.87
The probability that the stock returns are greater than 0% is -0.87.
b) the probability that the stock returns are less than 18%
=(X-mean)/sd
=(18-16.5)/19
=1.5/19
=0.0789
=0.08
The probability that the stock returns are less than 18% is 0.08