Assume that historical returns and future returns are independently an
Question # 00062177
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Updated on: 04/19/2015 06:04 PM Due on: 04/30/2015
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 Tables 10.3 and 10.4 (the dates are inclusive, so the time period spans 83 years).
b. Assume that the values in Tables 10.3 and 10.4 are the true expected return and volatility (i.e., estimated without error) and that these returns are normally distributed. For each investment, calculate the probability that an investor will not lose more than 5% in the next year? (Hint: 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 fall belowx.
c. Do all the probabilities you calculated in part (b) make sense? If so, explain. If not, can you identify the reason?
a. Calculate the 95% confidence intervals for the expected annual return of four different investments included in Tables 10.3 and 10.4 (the dates are inclusive, so the time period spans 83 years).
b. Assume that the values in Tables 10.3 and 10.4 are the true expected return and volatility (i.e., estimated without error) and that these returns are normally distributed. For each investment, calculate the probability that an investor will not lose more than 5% in the next year? (Hint: 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 fall belowx.
c. Do all the probabilities you calculated in part (b) make sense? If so, explain. If not, can you identify the reason?
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Solution: Assume that historical returns