TABLE 6-6 According to Investment Digest, the Arithmetic Mean of the Annual

question 182

Short Answer

TABLE 6-6
According to Investment Digest, the arithmetic mean of the annual return for common stocks from 1926-2010 was 9.5% but the value of the variance was not mentioned. Also 25% of the annual returns were below 8% while 65% of the annual returns were between 8% and 11.5%. The article claimed that the distribution of annual return for common stocks was bell-shaped and approximately symmetric. Assume that this distribution is normal with the mean given above. Answer the following questions without the help of a calculator, statistical software or statistical table.
-Referring to Table 6-6, find the probability that the annual return of a random year will be more than 7.5%.

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Definitions:

Risk-free Asset

A Risk-free Asset is an investment with a certain return, with no risk of financial loss, often exemplified by government bonds.

Risky Asset

An investment with a significant degree of uncertainty in its future payoffs, including the potential for losing some or all of the original investment.

Internet Bubble

A period, typically in the late 1990s, characterized by rapid expansion and inflation of the value of internet-based companies, leading to a market crash.

Stock Prices

The current market price of a share of a company's stock, determined by supply and demand in the stock market.