BSB123 THA 4 DEEMA RIZK.pdf - Take Home Assignment 4 Continuous Probability Distributions Before we can use the Z tables we have to standardise the

BSB123 THA 4 DEEMA RIZK.pdf - Take Home Assignment 4...

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DEEMA RIZK THA #4 BSB123 Take Home Assignment 4 Continuous Probability Distributions Before we can use the Z tables, we have to standardise the normal variable (X) first, i.e. converting X into Z score. THA 4 will assess you on your ability of applying the standardisation formula and using the Z and inverse Z tables. Stock Returns Stock returns are often assumed to be normally distributed. This means that the full probability distribution of returns can be explained by the mean and variance of returns, i.e. we can calculate probabilities by knowing the mean and variance. Assume that a stock has a mean annual return of 10% and an annual standard deviation of returns of 20%, (a) What is the probability that you will return between 5% and 15% in any given year? (2 marks) When X = 5% Z = (0.05-0.10) /0.2 = 0.25 When X = 15% Z= (0.15-0.10) / 0.2= 0.25 P(5< X < 15) = P(0.25 < Z < 0.25) = P(0.0987 < Z < 0.0987 =- 0.0987-0.0987 = 19.74% 5% 10% 15% The probability that I will return between 5 and 15 percent in any given year is 19.74% Probability of returns between 5 % and 15%