Question

6. Answer the questions below using the following information on stocks A, B, and C. Expected Return Standard Deviation Beta A 20% 12% 1.8 21% 10% 2.2 10% 10% 0.8 Assume the risk-free rate of return is 3% and the expected market return is 12%. If returns are normally distributed, then approximately two-thirds of the time the return on each stock will be? Answer: Stock A: 32% and 8% Stock B: 31% and 11% Stock C: 20% and 0%

Please help me understand how to come to the answer above using formulas or a financial calculator if possible. Thanks.

Answer 1

For stock A , the expected returns are given to be 20% ie $\mu$

For 2/3rd probability for normal distribution, the expected returns are ( $\mu +-\sigma$ )

That is the lower bound is 20 % - 12% = 8%

For upper bound 20%+12% = 32%

For Stock B,

Upper Bound = 21%+ 10% = 31%

Lower Bound = 21% - 10% = 11%

For Stock C,

Upper bound = 10% + 10% = 20%

Lower bound = 10% - 10% = 0%