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1 Leah Merryweather stock has an expected rate of return of 12
1 Leah Merryweather stock has an expected rate of return of 12.5% and a standard
deviation of 26.3%. Which one of the following best describes the probability that this stock
will lose 40% or more in any one given year?
- 0.5%
- 1.0%
- 2.5%
- 5.0%
- 16.0%
Explain work
2
Which of the following statements is true?
a. Except for tax-exempt investors and tax-deferred accounts, annual tax payments increase investment returns.
b. The only way to maintain purchasing power over time is to invest in bonds.
c. After adjusting for taxes, long-term bonds consistently outperform stocks.
d. An asset allocation decision for a taxable portfolio that does not include a substantial commitment to common stocks may make it difficult for the portfolio to maintain real value over time.
e. None of the above
Expert Solution
We kow Pr(R
Hence,
Pr(R<-40%)
=Pr(Z<(-40%-12.5%)/26.3%)
=Pr(Z<-1.99619772)
=2.5% [We know 1.96 corresponds to 95% confidence interval hence area to left of -1.96 is (100%-95%)/2=2.5%]
2
Answer :
True statement
d. An asset allocation decision for a taxable portfolio that does not include a substantial commitment to common stocks may make it difficult for the portfolio to maintain real value over time.
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