STATE: Andrew plans to retire in 40 years. He plans to invest part of his retirement funds in stocks, so he seeks out information on past returns. He learns that from 1966 to 2015, the annual returns on S&P 500 had mean 11.0% and standard deviation 17.0%. PLAN: The distribution of annual returns on common stocks is roughly symmetric, so the mean return over even a moderate number of years is close to Normal. We can use the Central Limit Theorem to make an inference. SOLVE: What is the probability, p, assuming that the past pattern of variation continues, that the mean annual return on common stocks over the next 40 years will exceed 10% ? (Enter your answer rounded to two decimal places.)
Inverse Normal Distribution
The method used for finding the corresponding z-critical value in a normal distribution using the known probability is said to be an inverse normal distribution. The inverse normal distribution is a continuous probability distribution with a family of two parameters.
Mean, Median, Mode
It is a descriptive summary of a data set. It can be defined by using some of the measures. The central tendencies do not provide information regarding individual data from the dataset. However, they give a summary of the data set. The central tendency or measure of central tendency is a central or typical value for a probability distribution.
Z-Scores
A z-score is a unit of measurement used in statistics to describe the position of a raw score in terms of its distance from the mean, measured with reference to standard deviation from the mean. Z-scores are useful in statistics because they allow comparison between two scores that belong to different normal distributions.
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