Answer:
0.6%
Explanation:
Probability = 0.9
Mean Returns = 6%
An investment consultant tells her client that the probability of making a positive return (with her suggested portfolio) is 0.9. What is the risk (measured by standard deviation) that this investment manager has assumed in her calculation, if it is known that returns from her suggested portfolio are normally distributed with a mean of 6%?
First, note that there is a high probability that this portfolio yields a positive return. The investment consultant foresees a 90% chance or possibility of the portfolio having a positive return or being successful.
90% = 0.9
Returns from the suggested portfolio are normally distributed, not skewed.
The mean of the distribution is 6% positive return.
All returns are measured in percent or as a percentage of initial amount invested, hence you can remove the percentage sign to calculate (0.9 of 6).
0.9 × 6 = 5.4
The risk assumed in her calculation is (6 - 5.4) = 0.6%