The smallest expected gain over the next year with a probability of 1 percent is 113.3%.
How does standard deviation affect returns?
- It reveals how much data can diverge from the investment's historical mean return. The returns will fluctuate more when the Standard Deviation is larger. For instance, the return will vary between 10 and 20% for a fund with an SD of 5% and an average rate of return of 15%.
- The monthly standard deviations are then all converted to annual values. is computed by adding up the portfolio's monthly returns and dividing the total by the number of months. It is also known as the arithmetic mean. The monthly standard deviation is multiplied by the square root of 12 in Morningstar's annualization process.
a stock has an annual return of 11 percent
a standard deviation of 44 percent
Prob(R ≥ 0.11 + 2.326(0.44)) = 1%
Prob(R ≥ 1.133) = 1% = 113.3%
While this is a large return, it is plausible, and even possible. Since it is not possible for a stock to lose more than 100% but it is possible for a stock to gain more than 100%, stock returns are not truly normal.
To learn more about standard deviations refer,
https://brainly.com/question/15096534
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