From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct?
A) With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two.
B) With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period.
C) This investment is not very good since the standard deviation is greater than the average return.
D) All of these statements are correct.

Question

Quizplus · Accepted Answer

Option A is incorrect because even though the average return is high, there is no guarantee that an investor will not lose money in the stock market in the next year or two. The stock market is unpredictable, and past returns do not guarantee future results.

Option B is correct because the high standard deviation suggests that there is a wide range of potential returns, both positive and negative, over a 25-year investment period.

Option C is incorrect because the standard deviation being greater than the average return does not necessarily mean that this investment is not very good. The stock market is known to have high volatility, which is why it has the potential to offer high returns.

Option D is incorrect because only option B is correct.

From 1950 to 2007, the Average Return in the Stock