Question

Suppose the average return on Asset A is 6 percent and the standard deviation is 8 percent, and the average return and standard deviation on Asset B are 3.2 percent and 2.6 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 9 percent? Less than 0 percent?

b. What is the probability that in any given year, the return on Asset B will be greater than 9 percent? Less than 0 percent?

c-1. In a particular year, the return on Asset A was −4.19 percent. How likely is it that such a low return will recur at some point in the future?

c-2. Asset B had a return of 9 percent in this same year. How likely is it that such a high return will recur at some point in the future?

Answer 1

Hello Sir/ Mam

Given that:

	A	B
Mean	6%	3.20%
S.D.	8%	2.60%

(a)

P(r_a>9%) :

Using excel formula,

=1-NORMDIST(9%,6%,8%,TRUE), we can get the answer that the probability = 64.62%

P(r_a<0%) :

Using excel formula,

=NORMDIST(0%,6%,8%,TRUE), we can get the answer that the probability = 22.66%

(b)

P(r_b>9%) :

Using excel formula,

=1-NORMDIST(9%,3.2%,2.6%,TRUE), we can get the answer that the probability = 1.28%

P(r_b<0%) :

Using excel formula,

=NORMDIST(0%,3.2%,2.6%,TRUE), we can get the answer that the probability = 10.92%

(c-1)

P(r_a=-4.19%) :

Using excel formula, "=NORMDIST(-4.19%,6%,8,%FALSE)", we can get the answer that the probability = 2.2157%

(c-2)

P(r_b=9%) :

Using excel formula, "=NORMDIST(9%,3.2%,2.6%,FALSE)", we can get the answer that the probability = 1.2745%

I hope this solves your doubt.

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