The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 14.7% (i.e. an average gain of 14.7%) with a standard deviation of 33%. A return of 0% means the value of the portfolio doesn't change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money.
What percent of years does this portfolio lose money, i.e. have a return less than 0%? (Please round the percent to two decimal places.)
%
Answers
Step-by-step explanation:
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Answer:
I’m having difficulty understanding part B of the final question on tonight’s MyOpenMath homework. I would appreciate any help or solutions you can provide.
Question 5 in the Normal Models assignment states:
3.8 CAPM: The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 14.7% (i.e. an average gain of 14.7%) with a standard deviation of 33%. A return of 0% means the value of the portfolio doesn’t change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money.
(please round answers to within one hundredth of a percent)
(a) What percent of years does this portfolio lose money, i.e. have a return less than 0%?
I was able to solve this portion of the question by finding the z-score with the equation:
0
−
14.7
33
0-14.733
From that equation I got a z-score of -0.445454545 which I rounded to -0.45. That z-score on the tables is equal to 0.3264, which gave me the answer of 32.64%
(b) What is the cutoff for the highest 15% of annual returns with this portfolio?
I am unsure if I don’t understand the language of this question, or if I am not using the correct equation. If anyone could help explain this, I would appreciate it.