Question

1: using the following data, please calculate the 95% prediction intervals for the four different investments.

If you want to be 95% certain that you don’t lose more than 8% on your investment, which investments should you choose?

                                                      Average Annual Return                               Standard Deviation of Returns

Small stocks                              18.37%                                                                  38.79%

S&P 500                                     11.84%                                                                  20.01%

Corporate Bond                        6.47%                                                                    6.98%

Treasury Bill                              3.46%                                                                     3.14%

EXPERTS ONLY PLEASE WITH EXPLANATIONS

Answer 1

95% Z score is 1.96

95% Lower end for Small stocks=18.37%-1.96*38.79%=-57.658%
95% Upper end for Small stocks=18.37%+1.96*38.79%=94.398%

95% Lower end for S&P500=11.84%-1.96*20.01%=-27.380%
95% Upper end for S&P500=11.84%+1.96*20.01%=51.060%

95% Lower end for Corporate Bonds=6.47%-1.96*6.98%=-7.211%
95% Upper end for Corporate Bonds=6.47%+1.96*6.98%=20.151%

95% Lower end for Treasury Bills=3.46%-1.96*3.14%=-2.694%
95% Upper end for Treasury Bills=3.46%+1.96*3.14%=9.614%

Choose Corporate Bonds and Treasury Bills