Statics Practice Problem Question

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(n) ) Could someone please explain to me why the extra divisor of SQRT(n) was thrown in there? Thank you in advance for the help.

thats gotta be wrong. no mention of a sample so we are dealing with population data. I think your way was correct. source of the question?

The question is right out of the CFAI textbook end-of-reading problems, and the solution is out of the back of the book… The SQRT(n) comes in as part of the standard error of a sample mean, but I don’t know why that is being included in this calculation. Help!! :slight_smile:

Needs to be included. The issue is the “lower AVERAGE return”. Of course, the answer is wrong anyway because normally we would use a gemoetric average not an arithmetic one but that’s another story…

BTW - Statics is the engineering discipline dealing with loads on things standing still. Statistics is about data analysis.

typo I guess… thanks?