Finance Questions: Investments

Solve the following problems and include all the necessary steps:

1) Based on 80 years of data, an investment has a Standard Deviation of 12 and an average return of 20%. What would the returns be 66.6% of the time:
a. 20%
b. 12%
c. Between 12% and 20%
d. Between 8% and 32%

2) Investment A has an annual return of 10% and a standard deviation of 8. Investment B has an annual return of 12% and a standard deviation of 10. If the risk-free rate is 4%, annually, which one is a more efficient investment?
a. Investment A
b. Investment B
c. Equally Efficient
d. Unable to determine

1) The answer is option D.

Explanation:
Normally distributed returns will fall “just short” of between minus and plus one standard deviation (SD) 66.6% “of the time” because a normal distribution is shaped that way, where the 66.6% (really about 68%) of the returns are close to the mean as in the following picture, where “close” means within one SD from the mean...

• Teaser.PNG

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