Over the past five years, a stock produced returns of 11 percent, 14 percent, 2 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Question

Quizplus · Accepted Answer

Average return = (0.11 + 0.14 + 0.02 - 0.09 + 0.05)/5 = 0.046F1F1F1S1F1F1F10 = F1F1F1S1F1F1F10[1/(5 - 1)][(0.11 - 0.046)² + (0.14 - 0.046)² + (0.02 - 0.046)² + (-0.09 - 0.046)² + (0.05 - 0.046)²] = 0.08961Lower bound of 68% probability range = 0.046 - (1 F1F1F1S1F1F1F10 0.08961) = -4.36 percentLower bound of 95% probability range = 0.046 - (2 F1F1F1S1F1F1F10 0.08961) = -13.32 percentThe probability of losing 10 percent or more is greater than 2.5 percent but less than 16 percent. Thus, the probability of NOT losing more than 10 percent is greater than 84 percent but less than 97.5 percent.

Over the Past Five Years, a Stock Produced Returns of 11