An equity has an expected rate of return of 8.3% and a standard deviation of 6.4%.Which one of the following best describes the probability that this equity will lose 11% or more in any one given year?
A)Less than 0.5%.
B)Less than 1.0%.
C)Less than 1.5%.
D)Less than 2.5%.
E)Less than 5%.

Question

Quizplus · Accepted Answer

The probability of losing 11% or more is calculated using the normal distribution. The z-score for a -11% return is (-11% - 8.3%) / 6.4% = -3.03125. A z-score of -3.03125 corresponds to a probability of less than 0.5% in the standard normal distribution.

An Equity Has an Expected Rate of Return of 8