Question

Suppose the average return on Asset A is 6.8 percent and the standard deviation is 8.8 percent, and the average return and standard deviation on Asset B are 4 percent and 3.4 percent, respectively. Further, assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions. a. What is the probability that in any given year, the return on Asset A will be greater than 10 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the probability that in any given year, the return on Asset B will be greater than 10 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. In a particular year, the return on Asset A was −4.27 percent. How likely is it that such a low return will recur at some point in the future? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. Asset B had a return of 9.8 percent in this same year. How likely is it that such a high return will recur at some point in the future? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places

Answer 1

Ans:- Avg return and the standard deviation of asset A is given 6.8% and 8.8% and for Asset B avg return and SD is given 4 and 3.4%. we need to use the NORMDIST function of excel to answer this question.

= NORMDIST(x,mean,standard_dev,cumulative).

(a) In any year the probability that the return on asset A is greater than 10% will be given by

= 1 - NORMADIST(10,6.8,8.8,TRUE)

= 1 - 0.6419

= 0.3581 = 35.81%.

The probability that it will be less than 0% will be given by

=NORMDIST(0.6.8,8.8,TRUE)

=0.2198 = 21.98%.

(b) In any given year the probability that the return on asset B is greater than 10% will be given by

= 1 - NORMADIST(10,4,3.4,TRUE)

= 1 - 0.9612

= 0.0388 = 3.88%

  The probability that it will be less than 0% will be given by

=NORMDIST(0,4,3.4,TRUE)

= 0.1197 = 11.97%

(c-1) In any given year the probability that the reurn on asset A will less than or equal to -4.27% will given by

=NORMDIST(-4.27,6.8,8.8,TRUE)

= 0.1042 =10.42%

(c-1) In any given year the probability that the return on asset B will be greater than or equal to 9.8% will be given by

= 1 -NORMDIST(9.8,4,3.4,TRUE)

= 1- 0.9560

=0.0440 =4.40%