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The Capital Asset Pricing Model (CAPM) is a financial

OpenIntro Statistics | 3rd Edition | ISBN: 9781943450039 | Authors: David M Diez; Christopher D Barr; Mine Çetinkaya-Rundel ISBN: 9781943450039 86

Solution for problem 3.8 Chapter 3

OpenIntro Statistics | 3rd Edition

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OpenIntro Statistics | 3rd Edition | ISBN: 9781943450039 | Authors: David M Diez; Christopher D Barr; Mine Çetinkaya-Rundel

OpenIntro Statistics | 3rd Edition

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Problem 3.8

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 doesnt change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money. (a) What percent of years does this portfolio lose money, i.e. have a return less than 0%? (b) What is the cuto for the highest 15% of annual returns with this portfolio?

Step-by-Step Solution:

Problem 3.8The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on aportfolio 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 thevalue 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.(a) What percent of years does this portfolio lose money, i.e. have a return less than 0%(b) What is the cuto for the highest 15% of annual returns with this portfolio Step-by-step solution Step 1 of 2 The financial model assumes that, the returns on a portfolio follows a normal distribution with mean 14.7% and standard deviation 33% a) Compute the percentage of years does the portfolio lose money. That is, P(X<0%) Therefore, 32.80% years, the portfolio lose money.

Step 2 of 2

Chapter 3, Problem 3.8 is Solved
Textbook: OpenIntro Statistics
Edition: 3
Author: David M Diez; Christopher D Barr; Mine Çetinkaya-Rundel
ISBN: 9781943450039

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The Capital Asset Pricing Model (CAPM) is a financial