A stock had annual returns of 8 percent, 14 percent, and 2 percent for the past...
A stock had annual returns of 8 percent, 14 percent, and 2 percent for the past three years. Based on these returns, what is the probability that this stock will return more than 26 percent in any one given year?
Homework Answers
Mean= (8%+14%+2%)/3 = 8%
Standard deviation (SD) = {1/(3-1)*[(8%-8%)^2 + (14%-8%)^2 + (2%-8%)^2]}^0.5 = 6%
Stock has to be more than 26% so z-score is (26%-mean)/SD = (26%-8%)/6% = 3
Reading from the z-score table, probability that the return will be less than 26% is 99.87% so probability that it is more than 26% is 100%-99.87% = 0.13%
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