Question

You are choosing between these four investments and you want to be​ 95% certain that you do not lose more than 8.00 % on your investment. Which investments could you​ choose? Small Stocks ​S&P 500 Corporate Bonds ​T-Bills Average return ​18.37% ​11.84% ​6.47% ​3.46% Standard Deviation of returns ​38.79% ​20.01% ​6.98% ​3.14%

Answer 1

Answer:

Corporate Bonds and T-Bills will have return above 8%

Explanation:

given data

investments  = 4

Small Stocks

​S&P 500

Corporate Bonds ​

T-Bills Average return

solution

we will get here first 95% confidence interval that is express as given formula that is

95% confidence interval = Return - 2 × SD to Return + 2 × SD    ................1

we get here as attach photo we get all the investment returns and standard deviation

 

so we can see here as per table given in attach only Corporate Bonds and T-Bills will have return above 8%  

so correct answer is Corporate Bonds and T-Bills

Answer 2

Obtaining the lower boundary of confidence for each of the investments, the investment which could be chosen are Corporate bonds and T-Bills

At 95% confidence level :

• Confidence interval = Return ± (2 × standard deviation)

Using the information given in the table :

Since we don not want to lose more than 8%, we could calculate the lower boundary only ;

Small Stocks :

(18.37 - 2 × 38.79) = -59.2%

S&P 500 :

(11.84 - 2 × 20.01)% = -28.2%

Corporate bonds :

(6.47 - 2 × 6.98)% = -7.5%

T - Bills :

(3.46 - 2 × 3.14)% = -2.8%

From the calculations made, the investment which could lead to a loss of less than 8% are corporate bonds and T - bills.

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