Assume that the average annual historical return for shares that comprise the Australian All Ordinaries index is 12%, and the standard deviation of returns is 20%. Based on these numbers what is a 95% prediction interval for 2012 returns?

Question

Quizplus · Accepted Answer

To calculate the prediction interval, we will use the formula:

Prediction interval = mean return +/- (Z-score x standard deviation)

Where the Z-score for a 95% confidence level is 1.96.

So, the prediction interval for 2012 returns is:

12% +/- (1.96 x 20%) = 12% +/- 39.2%

This gives us a range of:

12% - 39.2% = -27.2%
12% + 39.2% = 51.2%

Therefore, the 95% prediction interval for 2012 returns is -28% to 52%. Hence, the best choice is D.

Assume That the Average Annual Historical Return for Shares That