Suppose the average return on Asset A is 6.6 percent and the standard deviation

Question

Suppose the average return on Asset A is 6.6 percent and the standard deviation is 8.6 percent, and the average return and standard deviation on Asset B are 3.8 percent and 3.2 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions.

What is the probability that in any given year, the return on Asset A will be greater than 11 percent? Less than 0 percent?

What is the probability that in any given year, the return on Asset B will be greater than 11 percent? Less than 0 percent?

In a particular year, the return on Asset A was ?4.25 percent. How likely is it that a return at least that low return will recur at some point in the future?

Asset B had a return of 9.6 percent in this same year. How likely is it that return at least that high will recur at some point in the future?

Explanation / Answer

What is the probability that in any given year, the return on Asset A will be greater than 11 percent?

=1-NORMDIST(11%,6.6%,8.6%,TRUE)=30.445572520766100%

Less than 0 percent?

=NORMDIST(0%,6.6%,8.6%,TRUE)=22.140942403495200%

What is the probability that in any given year, the return on Asset B will be greater than 11 percent?

=1-NORMDIST(11%,3.8%,3.2%,TRUE)=1.222447265504470%

Less than 0 percent?

=NORMDIST(0%,3.8%,3.2%,TRUE)=11.751522829321400%

In a particular year, the return on Asset A was ?4.25 percent. How likely is it that a return at least that low return will recur at some point in the future?

=1-NORMDIST(4.25%,6.6%,8.6%,TRUE)=60.767171073906600%

Asset B had a return of 9.6 percent in this same year. How likely is it that return at least that high will recur at some point in the future?

=1-NORMDIST(9.6%,3.8%,3.2%,TRUE)=3.495448696823480%

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