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when standard deviation is greater than annual cash flow
and we need to calculate probability of default and non default
suppose annual cash flow be $65487 and standard deviation is $ 77818, and we need to calculate probability of default , at this time we will divide annual cash flow by standard deviation that is 65487/77818=0.842, and from normal distribution table we get 0.299. and adding 0.5 we get 0.799 or say 0.8, At this time how can we be sure that non default probability is 80% and default probability is 20%The normal distribution is symmetrical and therefore 50% lie above the average and 50% below.
If from the normal distribution tables, the answer is 0.3 (0.299) then it means there is a 30% probability of being between the average and that number of standard deviations away – the “cut-off”.
So….there is a 80% chance of being above the ‘cut-off’ and a 20% chance of being below it.
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