Assume the returns from holding smallcompany stocks are norm

Assume the returns from holding small-company stocks are normally distributed. Also assume the average annual return for holding the small-company stocks for a period of time was 15.5 percent and the standard deviation of those stocks for the period was 33.4 percent. Use the NORMDIST function in Excel® to answer the following questions.

Requirement 1: What is the approximate probability that your money will double in value in a single year?

Requirement 2: What is the approximate probability that your money will triple in value in a single year?

Solution

1.

This is like asking a 100% or more of a return. Thus, we take the complement of the NORMDIST,

=1 - NORMDIST(100,15.5, 33.4,1)

Thus,

P(double) = 0.0057041 [ANSWER]

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2.

This is like asking a 200% or more of a return. Thus, we take the complement of the NORMDIST,

=1 - NORMDIST(200,15.5, 33.4,1)

Thus,

P(triple) = 1.65729*10^-8 [ANSWER]