Question

The price-to-earning ratio for firms in a given industry is distributed according to normal distribution. In this industry, a firm with a standard normal variable value of Z=1:_________
a. Has an above average price-to-earning ratio
b. Has a below average price-to-earning ratio
c. Has an average price-to-earning ratio
d. May have an average or below average price-to-earnings ratio

Answer 1

Answer:

Option a)  Has an above average price-to-earning ratio                                            

Step-by-step explanation:

We are given the following in the question:

The price-to-earning ratio for firms in a given industry is distributed according to normal distribution.

For a particular firm the ratio x has a standard normal variable has a value,

z = 1

Formula:

$z_{score} = \displaystyle\frac{x-\mu}{\sigma}$

$1 = \dfrac{x - \mu}{\sigma}\\\\\sigma = x - \mu\\x = \mu + \sigma$

Thus, the firm has an above average price-to-earning ratio as the ratio is one standard deviation above the mean.

Option a)  Has an above average price-to-earning ratio