Assume that the equity risk premium is normally distributed with a population mean of 6% and a population standard deviation of 18%. ………..
B) What is the probability of a -2.0% or lower average return over a four-year period?
So, I understand the basic methodology behind solving this problem. The issue I’m having is with the calculation of the z-statistic. On my first pass on the question I calculated the z-statistic as follows: (o represents the std. deviation)
z = Xbar - u / o
However, when I checked the solution to problem, the z-statistic was calculated as follows:
z = Xbar - u / (o / SQRT
)
Could someone please explain to me why the extra divisor of SQRT was thrown in there? Thank you in advance for the help.
B) What is the probability of a -2.0% or lower average return over a four-year period?
So, I understand the basic methodology behind solving this problem. The issue I’m having is with the calculation of the z-statistic. On my first pass on the question I calculated the z-statistic as follows: (o represents the std. deviation)
z = Xbar - u / o
However, when I checked the solution to problem, the z-statistic was calculated as follows:
z = Xbar - u / (o / SQRT
)Could someone please explain to me why the extra divisor of SQRT
was thrown in there? Thank you in advance for the help.