The return on a stock is the change in its market price plus any dividend paymen

Question

The return on a stock is the change in its market price plus any dividend payments made. Total return is usually expressed as a percent of the beginning price. Figure 1.16 is a histogram of the distribution of the monthly returns for all stocks listed on U.S. markets from January 1985 to November 2010 (311 months).^22 The extreme low outlier is the market crash of October 1987, when stocks lost 23% of their value in one month. The other two low outliers are 16% during August 1998, a month when the Dow Jones Industrial Average experienced its second largest drop in history to that time, and the financial crisis in October 2008 when stocks lost 17% of their value. The distribution of monthly percent returns on U.S. common stocks from January 1985 to November 2010, for Exercise 1.32. (a) ignoring the outliers, describe the overall shape of the distribution of monthly returns. (b) What is the approximate center of this distribution? (For now, take the center to be the value with roughly half the months having lower returns and half having higher returns.) (c) Approximately what were the smallest and largest monthly returns, leaving out the outliers? (This is one way to describe the spread of the distribution.) (d) A return less than zero means that stocks lost value in that month. about what percent of all months and returns less than zero?

Explanation / Answer

A. Ignoring the outliers we could see that the overall distribution is normal because if we draw a line connecting the bars we could see an approximate normal curve.

B. The approximate center of the distribution would be 1.25. C. Approximate smallest and largest value of the distribution ignoring the outliers are - 11.5 and 13.5

DApproximately about 50%

D. Approximately about 50% of the data will fall less tha 0. Because, if we include the outliers the we could see that centre of the distribution will move frm 1 to 0. Hence, 0 being the middle we can expect that 50% of the months will have returns less than 0.

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