Practice Problem #3 Part B: The problem asks to estimate the probability of a -2% or lower average return over a 4-yr period. My question is: given that the returns are normally distributed and that the population standard deviataion is known, why is the answer for this question using (-2-Mu)/(stddev/sqrt(4)) instead of just (-2-Mu)/(stddev), which is the formula for standardizing a normal random variable as shown in page 394??
Thanks, but I am not sure this is the same thing. According to Joey, the answer calls for dividing by Stddev/sqrt(4) becausewe are estimating a CI for an individual observation? But I don’t see how that applies here. I’m confused!