You have invested in a stock with a expected return of 14% and a standard deviation of 7%. Your target rate of return is 7%. What is the probability that you will not meet your objective, assuming stock returns are normally distributed?
Answer(s): C
Explanation:
There is a 68% chance that the stock returns will be within one standard deviation of the mean i.e. with 68% chance, the stock returns will be between 7% and 21%. Hence, the probability that stock returnswill lie outside this range is 100% - 68% = 32%. Since the normal distribution is symmetrically distributed about the mean, the probability that the returns will be less than 7% equals 32/2 = 16% Instead of the above, you could also solve the problem using the z-score and the normal probability distribution table. You should, however, be aware of short-cuts like the above.