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Aleja Aleja
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7 years ago
Assume you have two stocks with the following returns and standard deviations:

Stock X has expected returns of 25% and a standard deviation of 5%
Stock Y has expected returns of 32% and a standard deviation of 11%.

Given this information and your understanding of the properties of the normal distribution, answer the following questions:

1.  Approximately 68% of the time Stock X returns will fall between          and            . Explain how you know this to be true.

2. Approximately 68% of the time Stock Y returns will fall between          and            .

3. Which stock has the highest risk and why?
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#1
7 years ago
1.
Answer:

The properties of the normal distribution dictate that Stock X returns will fall between plus or minus one standard deviation of the mean 68% of the time.  Stock X returns should therefore fall between 20% and 30% about 68% of the time.  The lower boundary is 25% - 5% = 20% and the upper boundary is 25% + 5% = 30%.

2.
Answer:

Stock Y returns should therefore fall between 21% and 43% about 68% of the time.  The lower boundary is 32% - 11% = 21% and the upper boundary is 32% + 11% = 43%.

3.
Answer:

Stock Y is riskier because it has a higher standard deviation.
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