Assume the returns from holding small-company stocks are normally distributed. Also assume the average annual return for holding the small-company stocks for a period of time was 16.5 percent and the standard deviation of those stocks for the period was 32.5 percent. Use the NORMDIST function in Excel® to answer the following questions.
Requirement 1:
What is the probability that your money will double in value in a single year?
To calculate the probability that your money will double in value in a single year using the NORMDIST function in Excel, you need to follow these steps:
1. Open Microsoft Excel and enter the following information in separate cells:
- Average annual return: 16.5% (cell A1)
- Standard deviation: 32.5% (cell A2)
2. In another cell, enter the formula for the probability using the NORMDIST function:
- Type "=1-NORMDIST(2, A1, A2, TRUE)" (without the quotation marks).
- The number "2" represents the value you want to calculate the probability for, i.e., doubling your money.
- A1 and A2 refer to the cells where you entered the average annual return and standard deviation, respectively.
- The "TRUE" argument instructs Excel to calculate the cumulative distribution function (CDF) of the normal distribution.
3. Press Enter to calculate the probability.
The resulting cell will contain the probability that your money will double in value in a single year, according to the provided average annual return and standard deviation.