The equity risk premium is defined as the difference between the rate of return on equity and the rate of return on a risk free asset, such as a 30-day Treasury bill rate. Assume the annual equity risk premium is normally distributed with a population mean of 7% and a population standard deviation of 19%. During the last four years, the equity risk premium has averaged -1.0%. Your have a group of clients who are very anxious about these negative returns.

Perform the following calculation in order to explain confidence intervals to your clients.

• Construct a 95% confidence interval for the population mean for a sample of four year returns.