From 1950 to 2007,the average return in the stock market,as measured by the S&P 500,was 13.2 percent and a standard deviation of 17 percent.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 the statements are correct.

Question

Quizplus · Accepted Answer

The high standard deviation indicates that there could be significant fluctuations in returns year-to-year. This means that there is a higher likelihood that an investor could experience negative returns in some years, even though the average return is high over the 25-year period. Therefore, statement B is correct. Statement A is incorrect because high average returns do not guarantee positive returns in any given year. Statement C is incorrect because it is not appropriate to compare the standard deviation to the average return - they are measuring different things. Statement D is incorrect because only statement B is correct.

From 1950 to 2007,the Average Return in the Stock Market,as