0
$\begingroup$

A young investment manager tells his client that the probability of making a positive return with his suggested portfolio is 81%. What is the risk (standard deviation) that this investment manager has assumed in his calculation if it is known that returns are normally distributed with a mean of 6.6%? Use Table 1. (Round "z" value to 2 decimal places and final answer to 3 decimal places.)

What is the Standard deviation ?

$\endgroup$
  • $\begingroup$ -.88 is the z which satisfies this equation,however I am still confused $\endgroup$ – Kim Oct 25 '13 at 19:24
  • $\begingroup$ Kim, see my edited response below. $\endgroup$ – user76844 Oct 28 '13 at 17:42
0
$\begingroup$

Hint: $Z = \frac{X-\mu}{\sigma}$, they told you that $P(X\geq0)=81\%$ and its mean is $6.6\%$. Re-write the Z-formula to get $\sigma Z + \mu = X$. Now, $P(Z\leq \frac{-\mu}{\sigma})=P(X\leq 0)=1-.81$. You need to find Z that satisfies this equation, then use it to solve for $\sigma$, i.e, $\sigma = \frac{-6.6\%}{z}$, where z satisfies the above equation, as previously stated.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.