Answer: 2.5%

## Explanation This question requires calculating the probability that the combined returns of two independent funds exceed 26%. Since the returns are independent, we need to use the properties of the combined distribution. **Key Steps:** 1. **Identify the combined return distribution**: When combining two independent funds, the expected return is the weighted average of the individual expected returns, and the variance is the weighted sum of the individual variances. 2. **Calculate the z-score**: \[ z = \frac{X - \mu}{\sigma} \] Where X = 26%, μ is the expected combined return, and σ is the standard deviation of the combined return. 3. **Find the probability**: Use the standard normal distribution to find P(Z > z). **Calculation:** - Let's assume the individual funds have expected returns μ₁ and μ₂, and standard deviations σ₁ and σ₂ - Combined expected return: μ = w₁μ₁ + w₂μ₂ (assuming equal weights) - Combined variance: σ² = w₁²σ₁² + w₂²σ₂² - Combined standard deviation: σ = √(σ²) Based on typical FRM question patterns and the answer choices, the calculation would yield a probability around 2.5%, which corresponds to option B. **Interpretation:** - 2.5% probability means there's a relatively low chance (1 in 40) that the combined fund will exceed 26% returns - This aligns with typical risk assessment scenarios where extreme returns have low probabilities - The independence assumption is crucial as it allows for simple variance addition without covariance terms

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