Question

From Jan. 1, 1960 to Jan. 1, 1985, the historical average annual rate of return in the hypothetical country of Westeros was 12%. The annual standard deviation of the rate of return is 10%. What is the upper bound of the 95.4% confidence interval for the annual rate of return based on this information?

a. 16%.
b. 10%.
c. 12%.
d. 14%.
e. 8%.

Answer 1

a. 16%.

Explanation:

According to the given situation, the calculation of the upper bond is shown below:-

Upper bond = Mean return + Z Value (Standard deviation ÷ SQRT(n))

= 12% + 2 × (10% ÷ 5)

= 16%

Note :- 95.4% confidence level has "Z Value" OF 2. (consider cumulative normal distribution table)

Therefore for computing the upper bond we simply applied the above formula.