Can somebody explain why they divide by the sqrt of 5? I would have expected a multiplication by sqrt of 5.
Many Thanks
What you doing is to find the probability of your portfolio return passes a threshold right? In this case the threshold is15.5%.
You need the mean and the standard error of returns to calculate the probability approached with a z-distribution. Why standard error? Because you have a sample, not a population.
Standard error = Sd / sqroot (n) … where n = number of observations.
In this case n = 5, so we solve for Standard error = 12 / sqroot (5) = 5.366
z = ( 15.5 - 5 ) / 5.366 = 1.96
The z - table gives you a 2.5% probability of passing 1.96 level.