Jeremy owns a stock that has historically returned 8.5 percent annually with a standard deviation of 11.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year.
A) 20.9
B) 22.9
C) 32.2
D) 42.1
E) 54.8

Question

Quizplus · Accepted Answer

To find the return that has a 0.5 percent chance of being exceeded, we need to subtract 0.5 percent from 100 percent to get 99.5 percent, convert that to a z-score, and then use the formula: return = mean + (z-score x standard deviation). Using a standard normal table, we find that the z-score corresponding to a probability of 0.995 is approximately 2.58. Plugging this into the formula yields: return = 8.5 + (2.58 x 11.2) = 42.1 percent. Therefore, the answer is D.

Jeremy Owns a Stock That Has Historically Returned 8