A hedge fund earns a mean annual return of 20% with a 10% standard deviation. One...

A hedge fund earns a mean annual return of 20% with a 10% standard deviation. One year, the fund return is -10%. What is the probability of a result bad or worse happening?Assume the distribution is symmetrical. (Hint: use Chebyshev’s Inequality).

a.) 11%

b.) 12.5%

c.) 25%

d.) 5.5%

Solutions

Expert Solution

Using Chebyshev's inequality, the value of k will be = 30/20 = 1.5. Hence, the probability that will lie within 1.5 s.d. will be at least = 1 - 1/1.5^2 = 55.55%. Hence, the required probability will be = (100 - 55.55)/2 = 22.5 = 25%

Option C is correct.

jeff jeffy answered 2 years ago

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