Question

Andrew plans to retire in 31 years. He plans to invest part of his retirement funds in stocks, so he seeks out information on past returns. He learns that over the entire 20th century, the real (that is, adjusted for inflation) annual returns on U.S. common stocks had mean 8.7% and standard deviation 20.2%. The distribution of annual returns on common stocks is roughly symmetric, so the mean return over even a moderate number of years is close to Normal.

(a) What is the probability (assuming that the past pattern of variation continues) that the mean annual return on common stocks over the next 31 years will exceed 11%?
(b) What is the probability that the mean return will be less than 7%?

Answer 1