Suppose that stock market returns are normally distributed with a mean of 7% and a standarddeviation of 20%. There should be about a 2.5% chance of getting a return greater than%.Write your answer as a whole number: eg, 28% = 28.

Step 1: State the given information.Mean = 7%Standard deviation = 20%2.5% chance Step 2: Subtract…

Answered: Suppose that stock market returns are…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A challenge we run into when forecasting future stock returns is that stock returns compound. So, when using historical averages to forecast the future, we need to average together the arithmetic and geometric average returns using Blume's Formula: R(T) = T GeoAvg + NT Arith Avg N-1 In this formula, N is the number of historical annual returns you are using to calculate your averages and T is the number of future annual returns you are forecasting. Suppose you gather the following prices for a stock in order to calculate the last 10 (N = 10) annual returns. The stock does not pay dividends. Time 0 1 Time 0 calculate the last 10 (N=10) annual returns. The stock does not pay dividends. 1 2 3 4 5 10 6 . 7 8 9 10 Price $23.16 $32.81 Price $23.16 $32.81 $33.63 $36.83 $41.95 $41.04 $33.83 $37.45 $30.56 $29.90 $47.93 Using Blume's formula, what is the expected return per year for the next 4 years (T = 4)? Enter your answer as a percentage, rounded to the nearest 0.0001. For example, for…
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Suppose that stock market returns are normally distributed with a mean of 7% and a standard deviation of 20%. There should be about a 2.5% chance of getting a return greater than %. Write your answer as a whole number: eg, 28% = 28.