## (solution) According to investment digest (Diversification and risk/reward

According to investment digest (Diversification and risk/reward relationship winter 1994 1-3) the mean of annual report for common stock from 1926-1992 was 15.4% and standard deviation of annual return was 21.5%. During the same 67-year time span the mean of annual return for long term government bond was 5.5% and the standard deviation was 7.0%. The article claim that the distribution of annual return for both common stock and long term government bond are bell shaped and approximately symmetric. Assume that these distribution are distributed as normal random variables with the mean and standard deviation given previously.

What is the probability that the stock returns are greater than 0%?

What is the probability that the stock return are less than 20%?

f(X) X -49.1 -27.6 -6.1 15.4 36.9 5.5 12.5 0 Normal distribution

P(lower)

.2369 P(upper)

.7631 z

-0.72 X

0 mean

15 std.dev

22 f(X) X -15.5 Normal distribution -8.5 -1.5 P(lower)

.9808 P(upper)...

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This question was answered on: Jan 30, 2021

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