1. Suppose that the mean of the annual return for common stocks from 2000 to 2012 was 14.37%, and the standard deviation of the annual return was 35.14%. Suppose also that during the same 12-year time span, the mean of the annual return for long-term government bonds was .6%, and the standard deviation was 2.1%. The distribution of annual returns for both common stocks and long-term government bonds are bell-shaped and approximately symmetric in this scenario. Assume that these distributions are distributed as normal random variables with the means and standard deviations given previously.
Confidence Interval Estimation
2. Compute a 95% confidence interval for the population mean, based on the following sample: 1.5, 1.54, 1.55, 1.51, 0.09, 0.08, 1.55, 0.07, 0.99, 0.98, 1.12, 1.13, 1.00, 1.56, and 1.53. Change the last number from 1.53 to 50 and recalculate the confidence interval. Using the results, describe the effect of an outlier or extreme value on the confidence interval.
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