You observe a portfolio for five years and determine that its average return is 12.5 % and the standard deviation of its returns in 19.5 %. Would a 30% loss next year be outside the 95% confidence interval for this portfolio?

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29 July, 21:50

You observe a portfolio for five years and determine that its average return is 12.5 % and the standard deviation of its returns in 19.5 %. Would a 30% loss next year be outside the 95% confidence interval for this portfolio?

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Waylon Allen · Answer 1

Yes, you can be confident that the portfolio will not lose more than 30% of its value next year

Explanation:

In this question, the average return of portfolio is 12.5% and the standard deviation is 19.5%. It is estimated that there will be 30% loss next year. The confidence interval is 95%.

Range = Average return ± 2 x Standard deviation Low aid = 12.5% - (2 x19.5%) = 12.5% - 39% = - 26.5%

High end = 12.5% + (2 x19.5%) = 12.5%+39% = 51.5%

Thus, the low end is

26.5%

The range of return at 95% confidence interval is - 26.5% to 51.5%