Question

Annual returns on common small stocks available to investors vary a lot. In a recent year, the mean return was 11.7% and the standard deviation of returns was 34.1%. The law of large numbers says that

a. if you invest in a large number of stocks chosen at random, your average return will have approximately a Normal distribution.

b. as you invest in more and more stocks chosen at random, your average return on these stocks gets ever closer to 11.7%.

c. you can get an average return higher than the mean 11.7% by investing in a large number of stocks.

Answer 1

b. as you invest in more and more stocks chosen at random, your average return on these stocks gets ever closer to 11.7%.

Explanation:

The law of large numbers in statistics states that as a sample size grows, its mean gets closer to the average of the entire sample figures.

Therefore, the law of large numbers says that as you invest in more and more stocks chosen at random, your average return on these stocks gets ever closer to 11.7%.