Suppose nominal bond returns approximately follow a normal distribution. Using the data in Table, construct a range that should contain 95 percent of historical bond returns. Next, refer to Figure. Is the number of years with bond returns outside the range you just calculated approximately what you expected?
Answer to relevant QuestionsSuppose there is an asset class with a standard deviation that lies about halfway between the standard deviations of stocks and bonds. Based on Figure, what would you expect the average return on this asset class to be? Notice in Figure that 1981 was the top year for nominal bill returns and 1982 was the top year for nominal bond returns. Why do you think that these two years saw such high returns on bonds and bills? D. S. Trucking Company stock pays a $1.50 dividend every year. A year ago the stock sold for $25 per share, and its total return during the past year was 20%. What does the stock sell for today? How can the weight given to a particular stock in a portfolio exceed 100 percent? Why do managers focus on the effect that an investment will have on reported earnings rather than on the investments cash flow consequences?
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