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 2016 returns?
A)-20%, 35%
B)-10%, 40%
C)-28%, 52%
D)-15%, 35%

Question

Quizplus · Accepted Answer

To calculate the 95% prediction interval, we need to use the formula:
Mean +/- 1.96(Standard Deviation)
Mean (average annual return) = 12%
Standard Deviation = 20%
Plugging these values into the formula:
12% +/- 1.96(20%) = 12% +/- 39.2%
Thus, the 95% prediction interval for 2016 returns is:
12% - 39.2% to 12% + 39.2% = -27.2% to 51.2%
Therefore, the best choice is C.

Assume That the Average Annual Historical Return for Shares That