According to Investment Digest (\"Diversification and the Risk/Reward Relationsh
ID: 3331617 • 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 2 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
**This was all information provided**
-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
**This was all information provided**
Explanation / Answer
Answer in details with calculations and explanation below:
Params of normal distribution have been given :
Mean = 16.5%
Stdev = 19%
We normalize using the above params:
a. P(X>0) = P(Z> 0-16.5/19) = P(Z>-16.5/19) = .81
b. P(X<18) = P(Z< 18-16.5/19) = P(Z< 1.5/19) = .53
c. We have used Z statistic in each part as Z statistic represents converting distribution into normal distribution
2) In 1st part -16.5/19 is -0.87 and 2nd part 1.5/19 = 0.08. So, right answer is C