According to Investment Digest (\"Diversification and the Risk/Reward Relationsh
ID: 3181377 • 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)
Explanation / Answer
we know that z score =(X-mean)/std deviation
a) P(X>0)=1-P(X<0)=1-P(Z<(0-16.5)/19)=1-P(Z<-0.8684)=1-0.1926=0.8074
b) P(X<18) =P(Z<(18-16.5)/19)=P(Z<0.0789)=0.5315
for part a) z=(0-16.5)/19=-0.8684
and por part B) zstat =0.0789