Your friend is the owner of a stock which had returns of 25 percent, -36 percent, 1 percent, and 16 percent for the past three years. Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year. Based on these returns, what is the probability that your friend is correct?

Question

Quizplus · Accepted Answer

Average return = (0.25 - 0.36 + 0.01 + 0.16)/4 = 0.015F1F1F1S1F1F1F10 = F1F1F1S1F1F1F10 [1/(4 - 1)] [(0.25 - 0.015)² + (-0.36 - 0.015)² + (0.01 - 0.015)² + (0.16 - 0.015)²] = 0.2689Upper end of 68 percent range = 0.015 + (1 F1F1F1S1F1F1F10 0.2689) = 28.39 percentUpper end of 95 percent range = 0.015 + (2 F1F1F1S1F1F1F10 0.2689) = 55.28 percentThe probability of earning at least 50 percent in any one year is greater than 2.5 percent but less than 16 percent.

Your Friend Is the Owner of a Stock Which Had