Question

The annual return of a well-known Company has historically had a mean of about 10% and a standard deviation of 21%. Suppose the return for the following year follows a normal distribution, with the historical mean and standard deviation. What is the probability that you will lose money in the next year by investing in this company?

Answer 1

0.3169

Explanation:

In order to find the probability for that you will lose money in the next year by investing in this company, we have to find z

Z = (x – mean)/standard deviation

Le x be the return expected,

Since we are looking for the probability that that you will lose money in the next year, we are going to find the probability that the return is less to zero.

P (x<0) = P(z < (0– 10)/21)

P (x<0) = P(z < -0.476)

Then we use the z table to find the area under the curve.

P (x<0) = 0.3169