Annual returns on the more than 5000 common stocks availableto investors vary al

Question

Annual returns on the more than 5000 common stocks availableto investors vary alot. In a recent year, the mean return was8.3% and the standard deviation of returns was 28.5%. The lawof large numbers says that a)You can get an average return higher than the mean 8.3% byinvesting in a large number of stocks. b) As you invest in more and more stocks chosen at random,your average return on these stocks gets closer to 8.3%. c) If you invest in a large number of stocks chosen at random,your average return will have approximately a Normaldistribution. Annual returns on the more than 5000 common stocks availableto investors vary alot. In a recent year, the mean return was8.3% and the standard deviation of returns was 28.5%. The lawof large numbers says that a)You can get an average return higher than the mean 8.3% byinvesting in a large number of stocks. b) As you invest in more and more stocks chosen at random,your average return on these stocks gets closer to 8.3%. c) If you invest in a large number of stocks chosen at random,your average return will have approximately a Normaldistribution.

Explanation / Answer

Annual returns on the more than 5000 common stocks availableto investors vary alot. In a recent year, the mean return was8.3% and the standard deviation of returns was 28.5%. The lawof large numbers says that a)You can get an average return higher than the mean 8.3% byinvesting in a large number of stocks. b) As youinvest in more and more stocks chosen at random, your averagereturn on these stocks gets closer to 8.3%. c) If you invest in a large number of stocks chosen at random,your average return will have approximately a Normaldistribution. The law of large numbers says thatthe mean from a large sample is close to the populationmean.

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