Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Suppose the returns on an asset are normally distributed. The historical average

ID: 3134697 • Letter: S

Question

Suppose the returns on an asset are normally distributed. The historical average annual return for the asset was 6.7 percent and the standard deviation was 12.6 percent. What is the probability that your return on this asset will be less than –10.1 percent in a given year? Use the NORMDIST function in Excel® to answer this question. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  

What range of returns would you expect to see 95 percent of the time? (Enter your answers for the range from lowest to highest. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What range would you expect to see 99 percent of the time? (Enter your answers for the range from lowest to highest. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Suppose the returns on an asset are normally distributed. The historical average annual return for the asset was 6.7 percent and the standard deviation was 12.6 percent. What is the probability that your return on this asset will be less than –10.1 percent in a given year? Use the NORMDIST function in Excel® to answer this question. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

a)

We first get the z score for the critical value. As z = (x - u) / s, then as          
          
x = critical value =    -10.1      
u = mean =    6.7      
          
s = standard deviation =    12.6      
          
Thus,          
          
z = (x - u) / s =    -1.333333333      
          
Thus, using a table/technology, the left tailed area of this is          
          
P(z <   -1.333333333   ) =    0.09121122 = 9.12% [ANSWER]

[You can also do =NORMDIST(-10.1, 6.7, 12.6, 1) to get the answer.]

*******************************

b)

As the middle area is          
          
Middle Area = P(x1<x<x2) =    0.95      
          
Then the left tailed area of the left endpoint is          
          
P(x<x1) = (1-P(x1<x<x2))/2 =    0.025      
          
Thus, the z score corresponding to the left endpoint, by table/technology, is          
          
z1 =    -1.959963985      
By symmetry,          
z2 =    1.959963985      
          
As          
          
u = mean =    6.7      
s = standard deviation =    12.6      
          
Then          
          
x1 = u + z1*s =    -17.99554621%      
x2 = u + z2*s =    31.39554621% [ANSWERS]

[You can also do =NORMINV(0.025, 6.7, 12.6) and =NORMINV(1-0.025, 6.7, 12.6).]

*******************************

c)

As the middle area is          
          
Middle Area = P(x1<x<x2) =    0.99      
          
Then the left tailed area of the left endpoint is          
          
P(x<x1) = (1-P(x1<x<x2))/2 =    0.005      
          
Thus, the z score corresponding to the left endpoint, by table/technology, is          
          
z1 =    -2.575829304      
By symmetry,          
z2 =    2.575829304      
          
As          
          
u = mean =    6.7      
s = standard deviation =    12.6      
          
Then          
          
x1 = u + z1*s =    -25.75544922%      
x2 = u + z2*s =    39.15544922% [ANSWER]      

[You can also do =NORMINV(0.005, 6.7, 12.6) and =NORMINV(1-0.005, 6.7, 12.6).]

********************************
      

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote