High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 22.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?
A) -6.64 percent
B) -8.67 percent
C) -11.28 percent
D) -12.12 percent
E) -15.13 percent

Question

Quizplus · Accepted Answer

Using the formula for expected loss with the normal distribution, we first find the z-score corresponding to a 2.5 percent probability: 
z = invNorm(0.025) = -1.96

We can then use this value to calculate the expected loss as: 
EL = E(R) + z * SD 
EL = 16.1% - 1.96 * 22.3% 
EL = -11.28%

Therefore, the answer is (C) -11.28 percent.

High Mountain Homes Has an Expected Annual Return of 16