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Unformatted text preview: r your estimate of the expect return is closest to: A) 10.6% to 28.2% B) 6.8% to 10.7% C) 37.0% to 47.6% D) 4.9% to 12.7% Answer: D
Explanation: A) B) C) R + R2 + ... + RN
D) 0.878
Rannual = 1 = = 8.8%
10
N
S&P 500 Realized Year End
Return
(R  R)
(R  R)2 1996
23.6%
14.78%
0.0218448 1997
24.7%
15.88%
0.0252174 1998
30.5%
21.68%
0.0470022 1999
9.0%
0.18%
3.24E06 2000
2.0%
10.82% 0.0117072 2001
17.3%
26.12% 0.0682254 2002
24.3%
33.12% 0.1096934 2003
32.2%
23.38%
0.0546624 2004
4.4%
4.42%
0.0019536 2005
7.4%
1.42%
0.0002016 Variance = SUM of (R  R)2 / T  1 = 0.3405116 / 9 = 0.0378346
Standard deviation = Variance = 0.0378346 = 0.1945112
Standard error = Standard Deviation / T = 0.1945112 / 10 = .01945 or 1.95%
95% Confidence Interval = mean return +or  2 standard errors, so
lower bound = .0878  2 × .0195 = 0.0488
upper bound = .0878 + 2 × .0195 = .1268 Diff: 3 Topic: 10.3 Historical Returns of Stocks and Bonds Skill: Analytical 10) Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM. The 95% confidence interval for your estimate of the expect return is closest to: A) 13.2% to 19.5% B) 10.1% to 22.7% C) 6.5% to 26.3% D) 15.1% to 47.8% Answer: B
Explanation: A) R + R2 + ... + RN
B) 1.638
Rannual = 1 = = 16.45% 10
N IBM Realized Year End
Return
(R  R)
(R  R)2 1996
1997
1998
1999
2000
2001...
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This note was uploaded on 05/03/2013 for the course FINANCE 354 taught by Professor Turner during the Fall '12 term at Maryland.
 Fall '12
 Turner
 Finance, Corporate Finance

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