3. Assume that the equity risk premium is normally distributed with a population mean of 6 percent and a population standard deviation of 18 percent. Over the last four years, equity returns (relative to the risk-free rate) have averaged −2.0 percent. You have a large client who is very upset and claims that results this poor should never occur. Evaluate your client’s concerns.

A. Construct a 95 percent confidence interval around the population mean for a sample of four-year returns.

B. What is the probability of a −2.0 percent or lower average return over a four-year period?