Assume that the average annual historical return for shares that comprise the Australian All Ordinaries index is 10%, 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 95% prediction interval, we use the formula:

[mean - (1.96 x standard deviation), mean + (1.96 x standard deviation)]

Substituting the values:

[10% - (1.96 x 20%), 10% + (1.96 x 20%)]  which simplifies to

[-30%, 50%]

Therefore, the best choice is C, -30%, 50%.

Assume That the Average Annual Historical Return for Shares That