Safety-first rules, comfused because, standard, expected, 214

Muddahudda

In Notes, Book 1, Page 214.

"professor's notes: Using a measure of two standard deviations places a 95% confidence interval around the expected return. If the client's minimum allowable return falls at least two standard devations below the expected return(i.e., it falls in the 2.5% lower tail of the distribution), the clients can be 95% confident the minimum allowable return will not be violated."

I think because of one tail distribution, here should be 97.5% confident interval.

Any one helps?

Roflnadal

2.5% on downside .........2.5% on upside ......................its a two tail distribution not one tail

ohai

Your quote answers your own question. It's a distribution with two tails, 2.5% on each tail, so 95% confidence interval. This is level 1.

pennyless

mik82 Wrote:
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> Your quote answers your own question. It's a
> distribution with two tails, 2.5% on each tail, so
> 95% confidence interval. This is level 1.

Why it is two-tail?

I think If the client's minimum allowable return falls more than two standard devations below the expected return, it is a violent.

while If the client's minimum allowable return rise more than two standard devations above the expected return, it is ok.

so it is one tail.

please point out my misunderstand, thanx a lot!!!

bkballa

The distribution is two tails, but the advisor is only concerned about the left tail, the negative returns, so the 2.5% in a two tail distribution is 5% or 95% confidence interval.

jmh530

mik82 Wrote:
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> The distribution is two tails, but the advisor is
> only concerned about the left tail, the negative
> returns, so the 2.5% in a two tail distribution is
> 5% or 95% confidence interval.


then why not choose a one tail distribution? becasue it only concerns the left tail.

bpdulog

We are talking about normal distribution here, so two tails.

zwjy

even if its normal distribution, it is actually 97.5% confidence interval that the minimum allowable return will not falls more than two standard devations below the expected return.

is it right?

mp3bu

Thanx guys!!!

strikethree

I'm sorry to ask this L1 question again

"If the client's minimum allowable return falls at least two standard deviations below the expected return(i.e., it falls in the 2.5% lower tail of the distribution), the clients can be 95% confident the minimum allowable return will not be violated."

I think the clients can be 97.5% confident the minimum allowable return will not be violated.

--no "interval" here.