Question

The annual return on an S&P 500 index mutual fund over the next 40 years has a normal distribution

with expected value of 10% and standard deviation of 22%. What is the expected ending value of

$10,000 invested in the mutual fund? What would happen to the expected terminal wealth if the

standard deviation were 30%? (show answer in excel)

Answer #1

Rate | Mean Return | 10% | |||||||

Nper | Number of years | 40 | |||||||

Pv | Investment | $10,000 | |||||||

FV | Expected Terminal Wealth | $452,593 | (Using FV function of excel withRate=10%, Nper=40, Pv=-10000) | ||||||

Excel command: FV(10%,40,,-10000) | |||||||||

If the standard deviation changes, the expected terminal wealth will remain the same | |||||||||

But the Variation of terminal wealth will increase with increase in Standard Deviation | |||||||||

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