A 10-year Commonwealth Government bond has an annual average return of 10.60% and a standard deviation of 5.64% (refer to Figure 10.11,p.314).In any one given year,you have a 68% chance that you will not earn more than ____ per cent;and a 95% chance that you will not lose more than____ per cent.

Question

Quizplus · Accepted Answer

For one year, the 68% confidence interval is one standard deviation away from the mean. Therefore, the maximum return that can be earned is 10.60% + 5.64% = 16.24%. The 95% confidence interval is two standard deviations away from the mean. Therefore, the maximum loss that can be incurred is 10.60% - 2(5.64%) = -0.68%. (Note: The negative value represents a potential loss.) The only option that includes these values is choice C.

A 10-Year Commonwealth Government Bond Has an Annual Average Return