Question

Assume the returns from holding small-company stocks are normally distributed. Also assume the average annual return for holding the small-company stocks for a period of time was 15.2 percent and the standard deviation of those stocks for the period was 33.1 percent. Use the NORMDIST function in Excel® to answer the following questions.

What is the approximate probability that your money will double in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal places, e.g., 32.161.)

What is the approximate probability that your money will triple in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 8 decimal places, e.g., 32.16161616.)

Answer 1

Annual Return = 15.20%

Standard deviation is 33.10%.

a.

if your money will double in value in a single year, it mean total return in one year would be 100%. Cumulative probablity of return below 100% in single year is calculated in excel using NORMDiSt function and calculated in excel and screen shot provided below:

Cumulative probablity of return in single year is 99.480%

Probability of 100% return = 1 - 99.480%

= 0.520%

approximate probability that your money will double in value in a single year is 0.520%.

b.

if your money will triple in value in a single year, it mean total return in one year would be 200%. Cumulative probablity of return below 200% in single year is calculated in excel using NORMDiSt function and calculated in excel and screen shot provided below:

Cumulative probablity of return in single year is 99.9999988%

Probability of 200% return = 1 - 99.9999988%

= 0.000001181%

approximate probability that your money will triple in value in a single year is 0.000001181%.