Question

10. The continuously compounded annual return on a stock is normally distributed with a mean of 20% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values

Answer 1

Answer: We should expect its actual return in any particular year to be between -40% and 80%.

Explanation:

Given : The continuously compounded annual return on a stock is normally distributed with a mean 20% and standard deviation of 30%.

From normal z-table, the z-value corresponds to 95.44 confidence is 2.

Therefore , the interval limits for 95.44 confidence level will be :

Lower limit = Mean -2(Standard deviation) = 20% -2(30%)= 20%-60%=-40%

Upper limit = Mean +2(Standard deviation)=20% +2(30%)= 20%+60%=80%

Hence, we should expect its actual return in any particular year to be between -40% and 80%.