Normal Distribution exercises
1. Suppose the annual returns on a certain investment portfolio can be described by a normal distribution
with a mean return of 7% and a standard deviation of 4%.
a) What is the probability that the return on the portfolio will be more than 10% in a given year?
b) What is the probability that the return will be between 5% and 9% in a given year?
c) If the bottom 5% of returns are considered "very poor", what is the cutoff return percentage for "very
poor"?
2. The daily percentage change in the price of Stock A is normally distributed with a mean of 0.5% and a
standard deviation of 2%.
a) What is the probability that the stock will gain more than 3% or lose more than 2% on any given
day?
b) What is probability that the stock will gain less than 2%?
c) What is probability that the stock will lose more than 2%?
3. A mutual fund has had an average annual return of 6% with a standard deviation of 5%.
a) Find the probability that the mutual fund will provide a return of more than 10% in the next year.
b) Find the probability that the mutual fund will provide a return of between 5% and 10% in the next
year?
c) Find the probability that the mutual fund will provide a return of less than 2% in the next year.
4. The yield of a particular corporate bond is normally distributed with a mean of 4% and a standard
deviation of 0.5%. What range of yields would you expect to encompass 95% of all yields for this bond?
5. A company's monthly sales are normally distributed with a mean of $500,000 and a standard deviation
of $50,000.
a) What is the likelihood that the company will have sales of more than $600,000 next month?
b) What is the likelihood that the company will have sales of less than $400,000 next month?
c) What is the likelihood that the company will have sales of between $600,000 and $1mln next
month?
6. An investor’s portfolio has a monthly return that is normally distributed with a mean of 1.5% and a
standard deviation of 3%. If the investor wishes to avoid a loss, what is the probability that the
portfolio's return will be below 0% in a given month?
7. The average credit card balance for consumers is $4,000 with a standard deviation of $500. If a bank
considers a balance of $5,000 as potential default risk, what percentage of consumers fall into this
category?
8. Interest rates for a specific type of loan are normally distributed with a mean of 5% and a standard
deviation of 1%. If a bank only wants to lend to the top 20% of borrowers in terms of best interest
rates, what interest rate should they offer?
9. An equity researcher believes that the rate of growth of a company's earnings is normally distributed
with a mean of 8% and a standard deviation of 2%. What is the probability that the company's earnings
growth will exceed 12%?
10. The price of homes in a particular city follows a normal distribution with an average price of $250,000
and a standard deviation of $30,000. What is the likelihood that a randomly selected house in this city
will cost more than $280,000?
11. A corporation historically has a dividend payout rate that is normally distributed with a mean of 2.5%
and a standard deviation of 0.3%. If the corporation wants to ensure its dividend is in the top 10% of its
historic payouts, at what rate should they set the next dividend?
12. A bank uses a credit scoring system where the scores are normally distributed with a mean of 680 and a
standard deviation of 40. The bank has a policy to approve loans only to individuals with scores above
700.
a) What percentage of individuals would be approved for a loan based on their credit score?
b) If the bank wants to have a promotional month where they approve the top 10% of scores, what should
the score threshold be for that month?
13. In a finance firm, the annual salaries of entry-level analysts are normally distributed with a mean of
$70,000 and a standard deviation of $8,000.
a) What is the probability that a randomly selected analyst earns more than $85,000?
b) The top 15% of these analysts receive a special bonus at the end of the year. What is the minimum
salary one needs to be in this bracket?
14. The daily fluctuations in the exchange rate between the dollar (USD) and euro (EUR) are normally
distributed with a mean of 0% (no change) and a standard deviation of 0.3%.
a) If you're planning to exchange dollars to euros tomorrow, what's the likelihood the rate will be
favorable by increasing more than 0.5%?
b) A company is planning to make a large transaction in euros next week. They'll proceed with the
transaction if there's less than a 5% chance the rate will decline by 0.4% or more. Should the
company proceed?
