(Round all answers 3 decimals) Assume that historical returns and future returns are independently and identically distr
Posted: Wed May 04, 2022 7:29 am
(Round all answers 3 decimals)
Assume that historical returns and future returns are independently and identically distributed and drawn from the same distribution.
a. Calculate the 95 % confidence intervals for the expected annual return
of four different investments included in the tables (shown below) the time period spans 92 years. Confidence interval for small stocks is Lower Bound: %? Upper Bound: %?
b. Assume that the values in the tables are the true expected return and
volatility (i.e., estimated without error) and that these returns are normally distributed. For eachinvestment, calculate the probability that an investor will not lose more than 5% in the next year. (Hint: For each inbestment, you can use the function normdist(x, mean, volatility, 1) in Excel to compute the probability that a normally distributed variable with a given mean and volatility will exceed x where x in
this case is negative -5 %. Then subtract that probability from 100% to find
the probability that an investor will not lose more than 5%.)
c. Do all the probabilities you calculated in part (b) make sense? If so, explain. If not, can you identify the reason?
Investment return : annual
Small stocks: 18.7%
s&P 500: 12.0%
Corporate bonds: 6.2%
Treasury bills: 3.4%
Investment return : volatility
Small stocks: 39.2
s&P 500: 19.8%
Corporate bonds: 6.4%
Treasury bills: 3.1%
Assume that historical returns and future returns are independently and identically distributed and drawn from the same distribution.
a. Calculate the 95 % confidence intervals for the expected annual return
of four different investments included in the tables (shown below) the time period spans 92 years. Confidence interval for small stocks is Lower Bound: %? Upper Bound: %?
b. Assume that the values in the tables are the true expected return and
volatility (i.e., estimated without error) and that these returns are normally distributed. For eachinvestment, calculate the probability that an investor will not lose more than 5% in the next year. (Hint: For each inbestment, you can use the function normdist(x, mean, volatility, 1) in Excel to compute the probability that a normally distributed variable with a given mean and volatility will exceed x where x in
this case is negative -5 %. Then subtract that probability from 100% to find
the probability that an investor will not lose more than 5%.)
c. Do all the probabilities you calculated in part (b) make sense? If so, explain. If not, can you identify the reason?
Investment return : annual
Small stocks: 18.7%
s&P 500: 12.0%
Corporate bonds: 6.2%
Treasury bills: 3.4%
Investment return : volatility
Small stocks: 39.2
s&P 500: 19.8%
Corporate bonds: 6.4%
Treasury bills: 3.1%