ch 12 #7 Suppose the average return on Asset A is 7.0 percent and the standard d

Question

ch 12

#7

Suppose the average return on Asset A is 7.0 percent and the standard deviation is 8.2 percent and the average return and standard deviation on Asset B are 4.1 percent and 3.5 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? (Round your answers to 2 decimal places. (e.g., 32.16))

What is the probability that in any given year, the return on Asset B will be greater than 11 percent? Less than 0 percent? (Round your answers to 2 decimal places. (e.g., 32.16))

In 1979, the return on Asset A was 4.37 percent. How likely is it that such a low return will recur at some point in the future? (Round your answer to 2 decimal places. (e.g., 32.16))

Asset B had a return of 10.80 percent in this same year. How likely is it that such a high return on T -bills will recur at some point in the future?(Round your answer to 2 decimal places. (e.g., 32.16))

15.

An asset has had an arithmetic return of 11.60 percent and a geometric return of 9.60 percent over the last 80 years. What return would you estimate for this asset over the next 5 years? 20 years? 36 years? (Round your answers to 2 decimal places. (e.g., 32.16))

What is the probability that in any given year, the return on Asset A will be greater than 11 percent? Less than 0 percent? (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

15) Blume’s formula

R (T) =(T-1/N-1) *Geometric average + (N-T/N-1) *Arithmetic average

R (5) =(5-1/80-1) *9.6% + (80-5/80-1) *11.6%

          = 9.54%

R (20) =(20-1/80-1)*9.6% + (80-20/80-1) *11.6%

            = 10.96%

R (36) =(36-1/80-1) *9.6% + (80-36/80-1) *11.6%

                =12.47%

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