Answered: The annual average return of S&p 500…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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7.25 The annual average return of S&p 500 from 1950-2002 was calculated as 9.7% with the standard deviation of 15.5% (Source: Hirshey, 2003). A person, who is going to retire in 40 years, wants to invest in stocks.

a. Assuming that the above annual returns have been impacted by extreme values, comment on the normality of the stock return over the next 49 years.

b. What is the probability that the mean return will be more than 15%?

c. What is the probability that the mean return is less that 5%?

Definition Definition Measure of central tendency that is the average of a given data set. The mean value is evaluated as the quotient of the sum of all observations by the sample size. The mean, in contrast to a median, is affected by extreme values. Very large or very small values can distract the mean from the center of the data. Arithmetic mean: The most common type of mean is the arithmetic mean. It is evaluated using the formula: μ = 1 N ∑ i = 1 N x i Other types of means are the geometric mean, logarithmic mean, and harmonic mean. Geometric mean: The nth root of the product of n observations from a data set is defined as the geometric mean of the set: G = x 1 x 2 ... x n n Logarithmic mean: The difference of the natural logarithms of the two numbers, divided by the difference between the numbers is the logarithmic mean of the two numbers. The logarithmic mean is used particularly in heat transfer and mass transfer. ln x 2 − ln x 1 x 2 − x 1 Harmonic mean: The inverse of the arithmetic mean of the inverses of all the numbers in a data set is the harmonic mean of the data. 1 1 x 1 + 1 x 2 + ...

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