The distribution of annual returns on common stock is roughly symmetric, but extreme observations are more frequent than in a Normal distribution. Because the distribution is not strongly non-Normal, the mean return over even a moderate number of years is close to Normal.

Annual real returns on the Standard & Poor’s 500 stock index over the period 1871 to 2004 have varied with mean 9.2% and standard deviation 20.6%. Andrew plans to retire in 45 years and is considering investing in stocks.

a) What is the probability (assuming the past pattern of variation continues) that the mean annual return over the next 45 years will exceed 15%?

b) What is the probability that the mean return over 45 years will be less than 5%?

c) What is the probability that the mean return over 5 years will be less than 5%?

Answer rating: 100% (QA)

a PX15 PZ1... View the full answer