The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning a negative rate of return (i.e. less than 0%) on FTC common stock. (Note: Table V is required to work this problem.)
A) 0.0228
B) 2.00
C) 0.5000
D) 0.9772

Question

Quizplus · Accepted Answer

We need to calculate the probability of the rate of return being less than 0%.

Let X be the rate of return on FTC common stock. Then, we have:

X ~ N(0.14, 0.07^2)

To calculate the probability of X being less than 0%, we need to standardize X using the formula:

Z = (X - μ) / σ

where μ = 0.14 and σ = 0.07

So, we have:

Z = (0 - 0.14) / 0.07 = -2

Using Table V, the probability of Z being less than -2 is 0.0228.

Therefore, the probability of earning a negative rate of return on FTC common stock is 0.0228, which corresponds to choice A.

The Expected Rate of Return for the Coming Year on FTC