Suppose the average return on Asset A is 61 percent and the

Suppose the average return on Asset A is 6.1 percent and the standard deviation is 8.1 percent and the average return and standard deviation on Asset B are 3.3 percent and 2.7 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions. What is the probability that in any given year, the return on Asset B will be greater than 9 percent? Less than 0 percent?

Solution

Let X denotes the return on Asset A and Y denotes the return on Asset B.

X~Normal(6.1,8.1²) and Y~Normal(3.3,2.7²)

Y-X~Normal(-2.8,72.9) or Normal(-2.8,8.53815²)

The probability that in any given year, the return on Asset B will be greater than 9 percent

=P(Y>X+9)

=P(Y-X>9)=0.0834810

The probability that in any given year, the return on Asset B will be less than 0 percent

=P(Y<0)=0.110812