Assume the returns from holding small-company stocks are normally distributed. A
ID: 3388456 • 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 15.5 percent and the standard deviation of those stocks for the period was 33.4 percent. Use the NORMDIST function in Excel® to answer the following questions.
Requirement 1: What is the approximate probability that your money will double in value in a single year?
Requirement 2: What is the approximate probability that your money will triple in value in a single year?
Explanation / Answer
1.
This is like asking a 100% or more of a return. Thus, we take the complement of the NORMDIST,
=1 - NORMDIST(100,15.5, 33.4,1)
Thus,
P(double) = 0.0057041 [ANSWER]
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2.
This is like asking a 200% or more of a return. Thus, we take the complement of the NORMDIST,
=1 - NORMDIST(200,15.5, 33.4,1)
Thus,
P(triple) = 1.65729*10^-8 [ANSWER]