Question

Empirical studies have provided support for
the belief that an ordinary share’s annual
rate of return is approximately normally
distributed. Suppose that you have invested in
the shares of a company for which the annual
return has an expected value of 16% and a
standard deviation of 10%.
a Find the probability that your one-year
return will exceed 30%.
b Find the probability that your one-year
return will be negative.
c Suppose that this company embarks on
a new, high-risk, but potentially highly
profi table venture. As a result, the return
on the share now has an expected value
of 25% and a standard deviation of 20%.
Answer parts (a) and (b) in light of the
revised estimates regarding the share’s
return.
d As an investor, would you approve of the
company’s decision to embark on the new
venture?

Answer 1