According to Investment Digest ("Diversification and the Risk/Reward Relationship", Winter 1994, 13), the mean of the annual return for common stocks from 1926 to 1992 was 15.4%, and the standard deviation of the annual return was 24.5%. During the same 67year time span, the mean of the annual return for longterm government bonds was 5.5%, and the standard deviation was 6.0%. The article claims that the distributions of annual returns for both common stocks and longterm government bonds are bellshaped and approximately symmetric. Assume that these distributions are distributed as normal random variables with the means and standard deviations given previously.
a. Find the probability that the return for common stocks will be greater than 0%.
b. Find the probability that the return for common stocks will be less than 20%.
Solution:
