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Principles of Finance

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Principles of FinanceVideo Activity

Normal Distribution Stock Return Calculations

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1 .
Assume the return on stocks follows a normal distribution. Is it more likely that a stock will return between -1 and +1 standard deviations from the mean or between -2 and +2 standard deviations from the mean? Why?
2 .
Would an investor be likely to prefer a stock that has a smaller standard deviation for annual stock returns or one with a larger standard deviation for annual stock returns? Why?

Portfolio Weights

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3 .
What are the reasons for calculating portfolio weights? What useful information does this provide to the investor?
4 .
What are the advantages and disadvantages of the equal weighting approach and the market cap weighting approach for portfolio allocation strategy?
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