You observe a portfolio for five years and determine that its average return is

Question

You observe a portfolio for five years and determine that its average return is 12.6% and the standard deviation of its returns in 19.3%. Would a 30% loss next year be outside the 95% confidence interval for this portfolio? The low end of the 95% prediction interval is | %. (Enter your response as a percent rounded to one decimal place.) 0 A. No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater O B. Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater O C. Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end ofthe prediction interval is less than 0 D. No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than-30%. than-30%. 30%. than-30%.

Explanation / Answer

z-score for 95% confidence interval is 1.96

Low end of the returns = Avg Return - z-score x Std. Dev. = 12.6 - 1.96 x 19.3 = -25.2%

Hence, B is correct. There is 95% confidence that the returns will not be more than a loss of 25.2%.

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