07 Hypothesis Testing

HypothesisTesting TestID:7658784
Question#1of88 QuestionID:413409
Whichofthefollowingstatementsaboutparametricandnonparametrictestsisleastaccurate?
A) Thetestofthedifferenceinmeansisusedwhenyouarecomparingmeansfromtwo
independentsamples.
B) Nonparametrictestsrelyonpopulationparameters.
C) Thetestofthemeanofthedifferencesisusedwhenperformingapairedcomparison.
Explanation
Nonparametrictestsarenotconcernedwithparameterstheymakeminimalassumptionsaboutthepopulationfromwhicha
samplecomes.Itisimportanttodistinguishbetweenthetestofthedifferenceinthemeansandthetestofthemeanofthe
differences.Also,itisimportanttounderstandthatparametrictestsrelyondistributionalassumptions,whereasnonparametric
testsarenotasstrictregardingdistributionalproperties.
Atestofthepopulationvarianceisequaltoahypothesizedvaluerequirestheuseofateststatisticthatis:
A) Chisquareddistributed.
B) tdistributed.
C) Fdistributed.
Explanation
Intestsofwhetherthevarianceofapopulationequalsaparticularvalue,thechisquaredteststatisticisappropriate.
Amanagerwantstotestwhethertwonormallydistributedandindependentpopulationshaveequalvariances.Theappropriate
teststatisticforthistestisa:
A) Fstatistic.
B) chisquarestatistic.
C) tstatistic.
Explanation
Foratestoftheequalityoftwovariances,theappropriateteststatistictestistheFstatistic.
Whichofthefollowingstatementsabouthypothesistestingismostaccurate?
A) Ifyoucandisprovethenullhypothesis,thenyouhaveproventhealternative
hypothesis.
B) ThepowerofatestisoneminustheprobabilityofaTypeIerror.
C) TheprobabilityofaTypeIerrorisequaltothesignificancelevelofthetest.
Explanation
Theprobabilityofgettingateststatisticoutsidethecriticalvalue(s)whenthenullistrueisthelevelofsignificanceandisthe
probabilityofaTypeIerror.Thepowerofatestis1minustheprobabilityofaTypeIIerror.Hypothesistestingdoesnotprove
ahypothesis,weeitherrejectthenullorfailtorejectit.
WhichofthefollowingstatementsabouttestingahypothesisusingaZtestisleastaccurate?
A) IfthecalculatedZstatisticliesoutsidethecriticalZstatisticrange,thenullhypothesis
canberejected.
B) Theconfidenceintervalforatwotailedtestofapopulationmeanatthe5%
levelofsignificanceisthatthesamplemeanfallsbetween1.96/nofthe
nullhypothesisvalue.
C) ThecalculatedZstatisticdeterminestheappropriatesignificanceleveltouse.
Explanation
ThesignificancelevelischosenbeforethetestsothecalculatedZstatisticcanbecomparedtoanappropriatecriticalvalue.
GeorgeAppletonbelievesthattheaveragereturnonequityintheamusementindustry,,isgreaterthan10%.Whatisthe
null(H0)andalternative(Ha)hypothesisforhisstudy?
A) H0:0.10versusHa:>0.10.
B) H0:>0.10versusHa:0.10.
C) H0:>0.10versusHa:<0.10.
Explanation
Thealternativehypothesisisdeterminedbythetheoryorthebelief.Theresearcherspecifiesthenullasthehypothesisthat
hewishestoreject(infavorofthealternative).Notethatthisisaonesidedalternativebecauseofthe"greaterthan"belief.
Whichofthefollowingstatementsabouthypothesistestingismostaccurate?ATypeIIerroristheprobabilityof:
A) rejectingatruenullhypothesis.
B) rejectingatruealternativehypothesis.
C) failingtorejectafalsenullhypothesis.
Explanation
TheTypeIIerroristheerroroffailingtorejectanullhypothesisthatisnottrue.
RonJacobi,managerwiththeTouleeDepartmentofNaturalResources,isresponsibleforsettingcatchandreleaselimitsforLakeNorby,
alargeandpopularfishinglake.ForthelasttwomonthshehasbeensamplingtodeterminewhethertheaveragelengthofNorthernPike
inthelakeexceeds18inches(usingasignificancelevelof0.05).Assumethatthepvalueis0.08.Inconcludingthattheaveragesizeof
thefishexceeds18inches,Jacobi:
A) iscorrect.
B) makesaTypeIIerror.
C) makesaTypeIerror.
Explanation
ThisstatementisanexampleofaTypeIerror,orrejectionofahypothesiswhenitisactuallytrue(alsoknownasthesignificancelevelof
thetest).Here,Ho:18inchesandHa:>18inches.Whenthepvalueisgreaterthanthesignificancelevel(0.08>0.05),weshould
failtorejectthenullhypothesis.SinceJacobirejectedHowhenitwastrue,hemadeaType1error.
Theotherstatementsareincorrect.TypeIIerrorsoccurwhenyoufailtorejectahypothesiswhenitisactuallyfalse(alsoknownasthe
powerofthetest).
Ifthenullhypothesisisinnocence,thenthestatement"Itisbetterthattheguiltygofree,thantheinnocentarepunished"isanexample
ofpreferringa:
A) typeIerroroveratypeIIerror.
B) typeIIerroroveratypeIerror.
C) higherlevelofsignificance.
Explanation
Thestatementshowsapreferenceforacceptingthenullhypothesiswhenitisfalse(atypeIIerror),overrejectingitwhenitistrue(atype
Ierror).
JillWoodallbelievesthattheaveragereturnonequityintheretailindustry,,islessthan15%.Whatarethenull(H0)and
alternative(Ha)hypothesesforherstudy?
A) H0:<0.15versusHa:0.15.
B) H0:0.15versusHa:<0.15.
C) H0:0.15versusHa:>0.15.
Explanation
Thisisaonesidedalternativebecauseofthe"lessthan"belief.
Whichofthefollowingstatementsaboutthevarianceofanormallydistributedpopulationisleastaccurate?
A) Thetestofwhetherthepopulationvarianceequals02 requirestheuseofaChi
squareddistributedteststatistic,[(n1)s2]/02.
B) Atestofwhetherthevarianceofanormallydistributedpopulationisequalto
somevalue 02,thehypothesesare:H0: 2= 02,versusHa: 2 02.
C) TheChisquareddistributionisasymmetricdistribution.
Explanation
TheChisquareddistributionisnotsymmetrical,whichmeansthatthecriticalvalueswillnotbenumericallyequidistantfrom
thecenterofthedistribution,thoughtheprobabilityoneithersideofthecriticalvalueswillbeequal(thatis,ifthereisa5%
levelofsignificanceandatwosidedtest,2.5%willlieoutsideeachofthetwocriticalvalues).
Student'stDistribution
LevelofSignificanceforOneTailedTest
df 0.100 0.050 0.025 0.01 0.005 0.0005
LevelofSignificanceforTwoTailedTest
df 0.20 0.10 0.05 0.02 0.01 0.001
24 1.318 1.711 2.064 2.492 2.797 3.745
25 1.316 1.708 2.060 2.485 2.787 3.725
Apitchingmachineiscalibratedtodeliverafastballataspeedof98milesperhour.Everyday,atechniciansamplesthe
speedoftwentyfivefastballsinordertodetermineifthemachineneedsadjustment.Today,thesampleshowedamean
speedof99milesperhourwithastandarddeviationof1.75milesperhour.Assumethepopulationisnormallydistributed.At
a95%confidencelevel,whatisthetvalueinrelationtothecriticalvalue?
A) Thetvalueexceedsthecriticalvalueby1.5standarddeviations.
B) Thecriticalvalueexceedsthetvalueby1.3standarddeviations.
C) Thetvalueexceedsthecriticalvalueby0.8standarddeviations.
Explanation
t=(9998)/(1.75/25)=2.86.Thecriticalvalueforatwotailedtestatthe95%confidencelevelwith24degreesof
freedomis2.06standarddeviations.Therefore,thetvalueexceedsthecriticalvalueby0.8standarddeviations.
SimoneMakisatelevisionnetworkadvertisingexecutive.Oneofherresponsibilitiesissellingcommercialspotsforasuccessfulweekly
sitcom.Iftheaverageshareofviewersforthisseasonexceeds8.5%,shecanraisetheadvertisingratesby50%forthenextseason.
Thepopulationofviewersharesisnormallydistributed.Asampleofthepast18episodesresultsinameanshareof9.6%withastandard
deviationof10.0%.IfMakiswillingtomakeaType1errorwitha5%probability,whichofthefollowingstatementsismostaccurate?
A) Withanunknownpopulationvarianceandasmallsamplesize,Makcannottestahypothesis
basedonhersampledata.
B) ThenullhypothesisMakneedstotestisthatthemeanshareofviewersisgreaterthan
8.5%.
C) Makcannotchargeahigherratenextseasonforadvertisingspotsbasedonthissample.
Explanation
Makcannotconcludewith95%confidencethattheaverageshareofviewersfortheshowthisseasonexceeds8.5andthusshecannot
chargeahigheradvertisingratenextseason.
Hypothesistestingprocess:
Step1:Statethehypothesis.Nullhypothesis:mean8.5%Alternativehypothesis:mean>8.5%
Step2:Selecttheappropriateteststatistic.Useatstatisticbecausewehaveanormallydistributedpopulationwithanunknown
variance(wearegivenonlythesamplevariance)andasmallsamplesize(lessthan30).Ifthepopulationwerenotnormallydistributed,
notestwouldbeavailabletousewithasmallsamplesize.
Step3:Specifythelevelofsignificance.ThesignificancelevelistheprobabilityofaTypeIerror,or0.05.
Step4:Statethedecisionrule.Thisisaonetailedtest.Thecriticalvalueforthisquestionwillbethetstatisticthatcorrespondstoa
significancelevelof0.05andn1or17degreesoffreedom.Usingthettable,wedeterminethatwewillrejectthenullhypothesisifthe
calculatedteststatisticisgreaterthanthecriticalvalueof1.74.
Step5:Calculatethesample(test)statistic.Theteststatistic=t=(9.68.5)/(10.0/18)=0.479(Note:Remembertousestandard
errorinthedenominatorbecausewearetestingahypothesisaboutthepopulationmeanbasedonthemeanof18observations.)
Step6:Makeadecision.Thecalculatedstatisticislessthanthecriticalvalue.Makcannotconcludewith95%confidencethatthemean
shareofviewersexceeds8.5%andthusshecannotchargehigherrates.
Note:Byeliminatingthetwoincorrectchoices,youcanselectthecorrectresponsetothisquestionwithoutperformingthecalculations.
Whatkindoftestisbeingusedforthefollowinghypothesisandwhatwouldazstatisticof1.68tellusaboutahypothesiswith
theappropriatetestandalevelofsignificanceof5%,respectively?
H0:B0
HA:B>0
A) Onetailedtestrejectthenull.
B) Twotailedtestfailtorejectthenull.
C) Onetailedtestfailtorejectthenull.
Explanation
Thewaythealternativehypothesisiswrittenyouareonlylookingattherightsideofthedistribution.Youareonlyinterestedin
showingthatBisgreaterthan0.Youdon'tcareifitislessthanzero.Foraonetailedtestatthe5%levelofsignificance,the
criticalzvalueis1.645.Sincetheteststatisticof1.68isgreaterthanthecriticalvaluewewouldrejectthenullhypothesis.
Whichoneofthefollowingisthemostappropriatesetofhypothesestousewhenaresearcheristryingtodemonstratethata
returnisgreaterthantheriskfreerate?Thenullhypothesisisframedasa:
A) greaterthanstatementandthealternativehypothesisisframedasalessthanor
equaltostatement.
B) lessthanstatementandthealternativehypothesisisframedasagreaterthan
orequaltostatement.
C) lessthanorequaltostatementandthealternativehypothesisisframedasagreater
thanstatement.
Explanation
Ifaresearcheristryingtoshowthatareturnisgreaterthantheriskfreeratethenthisshouldbethealternativehypothesis.
Thenullhypothesiswouldthentaketheformofalessthanorequaltostatement.
Whichofthefollowingstatementsaboutteststatisticsisleastaccurate?
A) Inatestofthepopulationmean,ifthepopulationvarianceisunknownandthesample
issmall,weshoulduseazdistributedteststatistic.
B) Inatestofthepopulationmean,ifthepopulationvarianceisunknown,we
shoulduseatdistributedteststatistic.
C) Inthecaseofatestofthedifferenceinmeansoftwoindependentsamples,weusea
tdistributedteststatistic.
Explanation
Ifthepopulationsampledhasaknownvariance,theztestisthecorrecttesttouse.Ingeneral,attestisusedtotestthe
meanofapopulationwhenthepopulationisunknown.Notethatinspecialcaseswhenthesampleisextremelylarge,thez
testmaybeusedinplaceofthettest,butthettestisconsideredtobethetestofchoicewhenthepopulationvarianceis
unknown.AttestisalsousedtotestthedifferencebetweentwopopulationmeanswhileanFtestisusedtocompare
differencesbetweenthevariancesoftwopopulations.
AsurveyistakentodeterminewhethertheaveragestartingsalariesofCFAcharterholdersisequaltoorgreaterthan$58,500
peryear.Whatistheteststatisticgivenasampleof175newlyacquiredCFAcharterholderswithameanstartingsalaryof
$67,000andastandarddeviationof$5,200?
A) 21.62.
B) 1.63.
C) 1.63.
Explanation
Withalargesamplesize(175)thezstatisticisused.Thezstatisticiscalculatedbysubtractingthehypothesizedparameter
fromtheparameterthathasbeenestimatedanddividingthedifferencebythestandarderrorofthesamplestatistic.Here,the
teststatistic=(samplemeanhypothesizedmean)/(populationstandarddeviation/(samplesize)1/2=(X)/(/n1/2)=
(67,00058,500)/(5,200/1751/2)=(8,500)/(5,200/13.22)=21.62.
Whichofthefollowingstatementsleastaccuratelydescribestheprocedurefortestingahypothesis?
A) Developahypothesis,computetheteststatistic,andmakeadecision.
B) Selectthelevelofsignificance,formulatethedecisionrule,andmakea
decision.
C) Computethesamplevalueoftheteststatistic,setuparejection(critical)region,and
makeadecision.
Explanation
Dependingupontheauthortherecanbeasmanyassevenstepsinhypothesistestingwhichare:
1. Statingthehypotheses.
2. Identifyingtheteststatisticanditsprobabilitydistribution.
3. Specifyingthesignificancelevel.
4. Statingthedecisionrule.
5. Collectingthedataandperformingthecalculations.
6. Makingthestatisticaldecision.
7. Makingtheeconomicorinvestmentdecision.
JohnJenkins,CFA,isperformingastudyonthebehaviorofthemeanP/Eratioforasampleofsmallcapcompanies.Which
ofthefollowingstatementsismostaccurate?
A) OneminustheconfidencelevelofthetestrepresentstheprobabilityofmakingaType
IIerror.
B) ThesignificancelevelofthetestrepresentstheprobabilityofmakingaTypeI
error.
C) ATypeIerrorrepresentsthefailuretorejectthenullhypothesiswhenitis,intruth,
false.
Explanation
ATypeIerroristherejectionofthenullwhenthenullisactuallytrue.Thesignificancelevelofthetest(alpha)(whichisone
minustheconfidencelevel)istheprobabilityofmakingaTypeIerror.ATypeIIerroristhefailuretorejectthenullwhenitis
actuallyfalse.
CumulativeZTable
z 0.04 0.05 0.06 0.07 0.08 0.09

1.2 0.8925 0.8944 0.8962 0.8980 0.8997 0.9015
1.3 0.9099 0.9115 0.9131 0.9147 0.9162 0.9177
1.4 0.9251 0.9265 0.9279 0.9292 0.9306 0.9319
1.5 0.9382 0.9394 0.9406 0.9418 0.9429 0.9441
1.6 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545
MariaHuffmanistheVicePresidentofHumanResourcesforalargeregionalcarrentalcompany.Lastyear,shehired
GrahamBrickleyasManagerofEmployeeRetention.Partofthecompensationpackagewasthechancetoearnoneofthe
followingtwobonuses:ifBrickleycanreduceturnovertolessthan30%,hewillreceivea25%bonus.Ifhecanreduceturnover
tolessthan25%,hewillreceivea50%bonus(usingasignificancelevelof10%).Thepopulationofturnoverratesisnormally
distributed.Thepopulationstandarddeviationofturnoverratesis1.5%.Arecentsampleof100branchofficesresultedinan
averageturnoverrateof24.2%.Whichofthefollowingstatementsismostaccurate?
A) Brickleyshouldnotreceiveeitherbonus.
B) Forthe50%bonuslevel,thecriticalvalueis1.65andHuffmanshouldgiveBrickleya
50%bonus.
C) Forthe50%bonuslevel,theteststatisticis5.33andHuffmanshouldgiveBrickleya50%
bonus.
Explanation
UsingtheprocessofHypothesistesting:
Step1:StatetheHypothesis.For25%bonuslevelHo:m30%Ha:m<30%For50%bonuslevelHo:m25%Ha:m<
25%.
Step2:SelectAppropriateTestStatistic.Here,wehaveanormallydistributedpopulationwithaknownvariance(standard
deviationisthesquarerootofthevariance)andalargesamplesize(greaterthan30.)Thus,wewillusethezstatistic.
Step3:SpecifytheLevelofSignificance.=0.10.
Step4:StatetheDecisionRule.Thisisaonetailedtest.Thecriticalvalueforthisquestionwillbethezstatisticthat
correspondstoanof0.10,oranareatotheleftofthemeanof40%(with50%totherightofthemean).Usingtheztable
(normaltable),wedeterminethattheappropriatecriticalvalue=1.28(Rememberthatwehighlyrecommendthatyouhave
the"common"zstatisticsmemorized!)Thus,wewillrejectthenullhypothesisifthecalculatedteststatisticislessthan1.28.
Step5:Calculatesample(test)statistics.Z(for50%bonus)=(24.225)/(1.5/100)=5.333.Z(for25%bonus)=(24.2
30)/(1.5/100)=38.67.
Step6:Makeadecision.Rejectthenullhypothesisforboththe25%and50%bonuslevelbecausetheteststatisticisless
thanthecriticalvalue.Thus,HuffmanshouldgiveSoberga50%bonus.
Theotherstatementsarefalse.Thecriticalvalueof1.28isbasedonthesignificancelevel,andisthusthesameforboththe
50%and25%bonuslevels.
Ananalystcalculatesthatthemeanofasampleof200observationsis5.Theanalystwantstodeterminewhetherthe
calculatedmean,whichhasastandarderrorofthesamplestatisticof1,issignificantlydifferentfrom7atthe5%levelof
significance.Whichofthefollowingstatementsisleastaccurate?:
A) Thenullhypothesiswouldbe:H0:mean=7.
B) ThealternativehypothesiswouldbeHa:mean>7.
C) Themeanobservationissignificantlydifferentfrom7,becausethecalculatedZ
statisticislessthanthecriticalZstatistic.
Explanation
Thewaythequestionisworded,thisisatwotailedtest.ThealternativehypothesisisnotHa:M>7becauseinatwotailedtest
thealternativeis=,while<and>indicateonetailedtests.Ateststatisticiscalculatedbysubtractingthehypothesized
parameterfromtheparameterthathasbeenestimatedanddividingthedifferencebythestandarderrorofthesample
statistic.Here,theteststatistic=(samplemeanhypothesizedmean)/(standarderrorofthesamplestatistic)=(57)/(1)=
2.ThecalculatedZis2,whilethecriticalvalueis1.96.Thecalculatedteststatisticof2fallstotheleftofthecriticalZ
statisticof1.96,andisintherejectionregion.Thus,thenullhypothesisisrejectedandtheconclusionisthatthesample
meanof5issignificantlydifferentthan7.Whatthenegativesignshowsisthatthemeanislessthan7apositivesignwould
indicatethatthemeanismorethan7.Thewaythenullhypothesisiswritten,itmakesnodifferencewhetherthemeanismore
orlessthan7,justthatitisnot7.
Thetestoftheequalityofthevariancesoftwonormallydistributedpopulationsrequirestheuseofateststatisticthatis:
A) Fdistributed.
B) zdistributed.
C) Chisquareddistributed.
Explanation
TheFdistributedteststatistic,F=s12/s22,isusedtocomparethevariancesoftwopopulations.
Foratwotailedtestofhypothesisinvolvingazdistributedteststatisticanda5%levelofsignificance,acalculatedzstatisticof
1.5indicatesthat:
A) thenullhypothesisisrejected.
B) thenullhypothesiscannotberejected.
C) thetestisinconclusive.
Explanation
Foratwotailedtestata5%levelofsignificancethecalculatedzstatisticwouldhavetobegreaterthanthecriticalzvalueof
1.96forthenullhypothesistoberejected.
JamesAmbercrombiebelievesthattheaveragereturnonequityintheutilityindustry,,isgreaterthan10%.Whatisnull(H0)
andalternative(Ha)hypothesisforhisstudy?
A) H0:0.10versusHa:<0.10.
B) H0:=0.10versusHa:0.10.
C) H0:0.10versusHa:>0.10.
Explanation
Thisisaonesidedalternativebecauseofthe"greaterthan"belief.Weexpecttorejectthenull.
Identifytheerrortypeassociatedwiththelevelofsignificanceandthemeaningofa5percentsignificancelevel.
=0.05meansthereis
Errortype a5percentprobability
of
A) rejectingatruenull
TypeIerror
hypothesis
B) rejectingatruenull
TypeIIerror
hypothesis
C) failingtorejectatrue
TypeIerror
nullhypothesis
Explanation
ThesignificancelevelistheriskofmakingaType1errorandrejectingthenullhypothesiswhenitistrue.
Ifwefailtorejectthenullhypothesiswhenitisfalse,whattypeoferrorhasoccured?
A) TypeII.
B) TypeI.
C) TypeIII.
Explanation
ATypeIIerrorisdefinedasfailingtorejectthenullhypothesiswhenitisactuallyfalse.
BrandeeShoffieldisthepublicrelationsmanagerforNightTrainExpress,alocalsportsteam.Shoffieldistryingtoselladvertisingspots
andwantstoknowifshecansaywith90%confidencethataveragehomegameattendanceisgreaterthan3,000.Attendanceis
approximatelynormallydistributed.Asampleoftheattendanceat15homegamesresultsinameanof3,150andastandarddeviationof
450.Whichofthefollowingstatementsismostaccurate?
A) Thecalculatedteststatisticis1.291.
B) ShoffieldshoulduseatwotailedZtest.
C) Withanunknownpopulationvarianceandasmallsamplesize,nostatisticisavailabletotest
Shoffield'shypothesis.
Explanation
Here,wehaveanormallydistributedpopulationwithanunknownvariance(wearegivenonlythesamplestandarddeviation)
andasmallsamplesize(lessthan30.)Thus,wewillusethetstatistic.
Theteststatistic=t=(3,1503,000)/(450/15)=1.291
FTable,CriticalValues,5PercentinUpperTail
Degreesoffreedomforthenumeratoralongtoprow
Degreesoffreedomforthedenominatoralongsiderow
10 12 15 20 24 30
25 2.24 2.16 2.09 2.01 1.96 1.92
30 2.16 2.09 2.01 1.93 1.89 1.84
40 2.08 2.00 1.92 1.84 1.79 1.74
AbbyNessisananalystforafirmthatspecializesinevaluatingfirmsinvolvedinmineralextraction.Nessbelievesthatthe
earningsofcopperextractingfirmsaremorevolatilethanthoseofbauxiteextractionfirms.Inordertotestthis,Nessexamines
thevolatilityofreturnsfor31copperfirmsand25bauxitefirms.Thestandarddeviationofearningsforcopperfirmswas
$2.69,whilethestandarddeviationofearningsforbauxitefirmswas$2.92.Ness'sNullHypothesisis12=22.Basedonthe
samples,canwerejectthenullhypothesisata90%confidencelevelusinganFstatistic?Nullis:
A) notrejected.
B) rejected.TheFvalueexceedsthecriticalvalueby0.849.
C) rejected.TheFvalueexceedsthecriticalvalueby0.71.
Explanation
F=s12/s22=$2.922/$2.692=1.18
FromanFtable,thecriticalvaluewithnumeratordf=24anddenominatordf=30is1.89.Wecannotrejectthenull
hypothesis.
Ifatwotailedhypothesistesthasa5%probabilityofrejectingthenullhypothesiswhenthenullistrue,itismostlikelythatthe:
A) probabilityofaTypeIerroris2.5%.
B) significancelevelofthetestis5%.
C) powerofthetestis95%.
Explanation
RejectingthenullhypothesiswhenitistrueisaTypeIerror.TheprobabilityofaTypeIerroristhesignificancelevelofthe
test.ThepowerofatestisoneminustheprobabilityofaTypeIIerror,whichcannotbecalculatedfromtheinformationgiven.
Whichofthefollowingstatementsaboutparametricandnonparametrictestsisleastaccurate?
A) Parametrictestsaremostappropriatewhenapopulationisheavilyskewed.
B) Nonparametrictestsareoftenusedinconjunctionwithparametrictests.
C) Nonparametrictestshavefewerassumptionsthanparametrictests.
Explanation
Foradistributionthatisnonnormallydistributed,anonparametrictestmaybemostappropriate.Anonparametrictesttends
tomakeminimalassumptionsaboutthepopulation,whileparametrictestsrelyonassumptionsregardingthedistributionof
thepopulation.Bothkindsoftestsareoftenusedinconjunctionwithoneanother.
Intheprocessofhypothesistesting,whatistheproperorderforthesesteps?
A) Statethehypotheses.Specifythelevelofsignificance.Collectthesampleand
calculatetheteststatistics.Makeadecision.
B) Collectthesampleandcalculatethesamplestatistics.Statethehypotheses.
Specifythelevelofsignificance.Makeadecision.
C) Specifythelevelofsignificance.Statethehypotheses.Makeadecision.Collectthe
sampleandcalculatethesamplestatistics.
Explanation
Thehypothesesmustbeestablishedfirst.Thentheteststatisticischosenandthelevelofsignificanceisdetermined.
Followingthesesteps,thesampleiscollected,theteststatisticiscalculated,andthedecisionismade.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
40 1.303 1.684 2.021 2.423 2.704 3.551
KenWallaceisinterestedintestingwhethertheaveragepricetoearnings(P/E)offirmsintheretailindustryis25.Usingat
distributedteststatisticanda5%levelofsignificance,thecriticalvaluesforasampleof41firmsis(are):
A) 1.685and1.685.
B) 1.96and1.96.
C) 2.021and2.021.
Explanation
Thereare411=40degreesoffreedomandthetestistwotailed.Therefore,thecriticaltvaluesare2.021.Thevalue
2.021isthecriticalvalueforaonetailedprobabilityof2.5%.
Ahypothesistesthasapvalueof1.96%.Ananalystshouldrejectthenullhypothesisatasignificancelevelof:
A) 6%,butnotatasignificancelevelof4%.
B) 3%,butnotatasignificancelevelof1%.
C) 4%,butnotatasignificancelevelof2%.
Explanation
Thepvalueof1.96%isthesmallestlevelofsignificanceatwhichthehypothesiscanberejected.
SusanBellowsiscomparingthereturnonequityfortwoindustries.Sheisconvincedthatthereturnonequityforthediscount
retailindustry(DR)isgreaterthanthatoftheluxuryretail(LR)industry.Whatarethehypothesesforatestofhercomparison
ofreturnonequity?
A) H0:DR=LRversusHa:DRLR.
B) H0:DR=LRversusHa:DR<LR.
C) H0:DRLRversusHa:DR>LR.
Explanation
shewishestoreject(infavorofthealternative).Notethatthisisaonesidedalternativebecauseofthe"greaterthan"belief.
Whichofthefollowingstatementsabouthypothesistestingisleastaccurate?
A) ATypeIIerrorisfailingtorejectafalsenullhypothesis.
B) IfthealternativehypothesisisHa:>0,atwotailedtestisappropriate.
C) Thenullhypothesisisastatementaboutthevalueofapopulationparameter.
Explanation
Thehypothesesarealwaysstatedintermsofapopulationparameter.TypeIandTypeIIarethetwotypesoferrorsyoucan
makerejectanullhypothesisthatistrueorfailtorejectanullhypothesisthatisfalse.Thealternativemaybeonesided(in
whichcasea>or<signisused)ortwosided(inwhichcaseaisused).
ATypeIerror:
A) rejectsatruenullhypothesis.
B) rejectsafalsenullhypothesis.
C) failstorejectafalsenullhypothesis.
Explanation
ATypeIErrorisdefinedasrejectingthenullhypothesiswhenitisactuallytrue.TheprobabilityofcommittingaTypeIerroris
thesignificanceleveloralpharisk.
Thepowerofthetestis:
A) theprobabilityofrejectingatruenullhypothesis.
B) equaltothelevelofconfidence.
C) theprobabilityofrejectingafalsenullhypothesis.
Explanation
Thisisthedefinitionofthepowerofthetest:theprobabilityofcorrectlyrejectingthenullhypothesis(rejectingthenull
hypothesiswhenitisfalse).
IfthenullhypothesisisH0:0,whatistheappropriatealternativehypothesis?
A) Ha:>0.
B) Ha:<0.
C) Ha:0.
Explanation
Thealternativehypothesismustincludethepossibleoutcomesthenulldoesnot.
peryear.Assuminganormaldistribution,whatistheteststatisticgivenasampleof75newlyacquiredCFAcharterholders
withameanstartingsalaryof$57,000andastandarddeviationof$1,300?
A) 2.31.
B) 19.99.
C) 19.99.
Explanation
(57,00054,000)/(1,300/751/2)=(3,000)/(1,300/8.66)=19.99.
Foratdistributedteststatisticwith30degreesoffreedom,aonetailedtestspecifyingtheparametergreaterthansomevalue
anda95%confidencelevel,thecriticalvalueis:
A) 1.640.
B) 1.697.
C) 2.042.
Explanation
Thisisthecriticalvalueforaonetailedprobabilityof5%and30degreesoffreedom.
Agoalofan"innocentuntilprovenguilty"justicesystemistoplaceahigherpriorityon:
A) avoidingtypeIIerrors.
B) thenullhypothesis.
C) avoidingtypeIerrors.
Explanation
Inan"innocentuntilprovenguilty"justicesystem,thenullhypothesisisthattheaccusedisinnocent.Thehypothesiscanonly
berejectedbyevidenceprovingguiltbeyondareasonabledoubt,favoringtheavoidanceoftypeIerrors.
Thefirststepintheprocessofhypothesistestingis:
A) thecollectionofthesample.
B) tostatethehypotheses.
C) selectingtheteststatistic.
Explanation
Theresearchermuststatethehypothesespriortothecollectionandanalysisofthedata.Moreimportantly,itisnecessaryto
knowthehypothesesbeforeselectingtheappropriateteststatistic.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
18 1.330 1.734 2.101 2.552 2.878 3.922
19 1.328 1.729 2.093 2.539 2.861 3.883
20 1.325 1.725 2.086 2.528 2.845 3.850
21 1.323 1.721 2.080 2.518 2.831 3.819
Inatwotailedtestofahypothesisconcerningwhetherapopulationmeaniszero,JackOlsoncomputesatstatisticof2.7
basedonasampleof20observationswherethedistributionisnormal.Ifa5%significancelevelischosen,Olsonshould:
A) rejectthenullhypothesisandconcludethatthepopulationmeanissignificantly
differentfromzero.
B) rejectthenullhypothesisandconcludethatthepopulationmeanisnot
significantlydifferentfromzero.
C) failtorejectthenullhypothesisthatthepopulationmeanisnotsignificantlydifferent
fromzero.
Explanation
Ata5%significancelevel,thecriticaltstatisticusingtheStudent'stdistributiontableforatwotailedtestand19degreesof
freedom(samplesizeof20less1)is2.093(withalargesamplesizethecriticalzstatisticof1.960maybeused).Because
thecriticaltstatisticof2.093istotheleftofthecalculatedtstatisticof2.7,meaningthatthecalculatedtstatisticisinthe
rejectionrange,werejectthenullhypothesisandweconcludethatthepopulationmeanissignificantlydifferentfromzero.
Whichofthefollowingstatementsabouthypothesistestingisleastaccurate?
A) ATypeIIerroristheprobabilityoffailingtorejectanullhypothesisthatisnottrue.
B) ATypeIerroristheprobabilityofrejectingthenullhypothesiswhenthenull
hypothesisisfalse.
C) ThesignificancelevelistheprobabilityofmakingaTypeIerror.
Explanation
ATypeIerroristheprobabilityofrejectingthenullhypothesiswhenthenullhypothesisistrue.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
10 1.372 1.812 2.228 2.764 3.169 4.587
11 1.363 1.796 2.201 2.718 3.106 4.437

12 1.356 1.782 2.179 2.681 3.055 4.318
22 1.321 1.717 2.074 2.508 2.819 3.792
23 1.319 1.714 2.069 2.500 2.807 3.768
24 1.318 1.711 2.064 2.492 2.797 3.745
RoyFisher,CFA,wantstodeterminewhetherthereisasignificantdifference,atthe5%significancelevel,betweenthemean
monthlyreturnonStockGHIandthemeanmonthlyreturnonStockJKL.Fisherassumesthevariancesofthetwostocks'
returnsareequal.Usingthelast12monthsofreturnsoneachstock,Fishercalculatesatstatisticof2.0foratestofequality
ofmeans.Basedonthisresult,Fisher'stest:
A) rejectsthenullhypothesis,andFishercanconcludethatthemeansareequal.
B) failstorejectthenullhypothesis.
C) rejectsthenullhypothesis,andFishercanconcludethatthemeansarenotequal.
Explanation
ThenullhypothesisforatestofequalityofmeansisH0:12=0.Assumingthevariancesareequal,degreesoffreedom
forthistestare(n1+n22)=12+122=22.FromthetableofcriticalvaluesforStudent'stdistribution,thecriticalvaluefor
atwotailedtestatthe5%significancelevelfordf=22is2.074.Becausethecalculatedtstatisticof2.0islessthanthecritical
value,thistestfailstorejectthenullhypothesisthatthemeansareequal.
Atestofahypothesisthatthemeansoftwonormallydistributedpopulationsareequalbasedontwoindependentrandom
samples:
A) isdonewithatstatistic.
B) isbasedonaChiSquarestatistic.
C) isapairedcomparisonstest.
Explanation
Wehavetwoformulasforteststatisticsforthehypothesisofequalsamplemeans.Whichoneweusedependsonwhetheror
notweassumethesampleshaveequalvariances.EitherformulageneratesateststatisticthatfollowsaTdistribution.
A) 0.91.
B) 10.56.
C) 10.56.
Explanation
teststatistic=(samplemeanhypothesizedmean)/(populationstandarddeviation/(samplesize)1/2)=(X)/(/n1/2)=
(64,00059,000)/(5,500/1351/2)=(5,000)/(5,500/11.62)=10.56.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
28 1.313 1.701 2.048 2.467 2.763 3.674
29 1.311 1.699 2.045 2.462 2.756 3.659
30 1.310 1.697 2.042 2.457 2.750 3.646
InordertotestwhetherthemeanIQofemployeesinanorganizationisgreaterthan100,asampleof30employeesistaken
andthesamplevalueofthecomputedteststatistic,tn1=3.4.Ifyouchoosea5%significancelevelyoushould:
A) failtorejectthenullhypothesisandconcludethatthepopulationmeanislessthanor
equalto100.
B) rejectthenullhypothesisandconcludethatthepopulationmeanisgreater
that100.
C) failtorejectthenullhypothesisandconcludethatthepopulationmeanisgreaterthan
100.
Explanation
Ata5%significancelevel,thecriticaltstatisticusingtheStudent'stdistributiontableforaonetailedtestand29degreesof
freedom(samplesizeof30less1)is1.699(withalargesamplesizethecriticalzstatisticof1.645maybeused).Becausethe
calculatedtstatisticof3.4isgreaterthanthecriticaltstatisticof1.699,meaningthatthecalculatedtstatisticisintherejection
range,werejectthenullhypothesisandweconcludethatthepopulationmeanisgreaterthan100.
Ananalystconductsatwotailedztesttodetermineifsmallcapreturnsaresignificantlydifferentfrom10%.Thesamplesize
was200.Thecomputedzstatisticis2.3.Usinga5%levelofsignificance,whichstatementismostaccurate?
A) Failtorejectthenullhypothesisandconcludethatsmallcapreturnsarecloseenough
to10%thatwecannotsaytheyaresignificantlydifferentfrom10%.
B) Youcannotdeterminewhattodowiththeinformationgiven.
C) Rejectthenullhypothesisandconcludethatsmallcapreturnsaresignificantly
differentfrom10%.
Explanation
Atthe5%levelofsignificancethecriticalzstatisticforatwotailedtestis1.96(assumingalargesamplesize).Thenull
hypothesisisH0:x=10%.ThealternativehypothesisisHA:x10%.Becausethecomputedzstatisticisgreaterthanthe
criticalzstatistic(2.33>1.96),werejectthenullhypothesisandweconcludethatsmallcapreturnsaresignificantlydifferent
than10%.
Whichofthefollowingstatementsabouthypothesistestingismostaccurate?
A) WhenthecriticalZstatisticisgreaterthanthesampleZstatisticinatwotailedtest,
rejectthenullhypothesisandacceptthealternativehypothesis.
B) Ahypothesizedmeanof3,asamplemeanof6,andastandarderrorofthe
samplingmeansof2giveasampleZstatisticof1.5.
C) ATypeIerrorisrejectingthenullhypothesiswhenitistrue,andaTypeIIerroris
acceptingthealternativehypothesiswhenitisfalse.
Explanation
Z=(63)/2=1.5.ATypeIIerroriswronglyacceptingthenullhypothesis.Thenullhypothesisshouldberejectedwhenthe
sampleZstatisticisgreaterthanthecriticalZstatistic.
Thetablebelowisforfivesamplesdrawnfromfiveseparatepopulations.Thefarleftcolumnsgiveinformationonthe
populationdistribution,populationvariance,andsamplesize.Therighthandcolumnsgivethreechoicesfortheappropriate
tests:z=zstatistic,andt=tstatistic."None"meansthatateststatisticisnotavailable.
SamplingFrom TestStatisticChoices
Distribution Variance n One Two Three
Nonnormal 0.75 100 z z z
Normal 5.60 75 z z z
Nonnormal n/a 15 t t none
Normal n/a 18 t t t
Nonnormal 14.3 15 z t none
Whichsetofteststatisticchoices(One,Two,orThree)matchesthecorrectteststatistictothesampleforallfivesamples?
A) One.
B) Three.
C) Two.
Explanation
Fortheexam:COMMITTHEFOLLOWINGTABLETOMEMORY!
Whenyouaresamplingfroma: andthesamplesizeissmall, andthesamplesizeislarge,

usea: usea:
Normaldistributionwithaknownvariance zstatistic zstatistic
Normaldistributionwithanunknown tstatistic tstatistic
variance
Nonnormaldistributionwithaknown
notavailable zstatistic
variance
Nonnormaldistributionwithanunknown
notavailable tstatistic
variance
WhichofthefollowingstatementsregardingTypeIandTypeIIerrorsismostaccurate?
A) ATypeIIerrorisrejectingthealternativehypothesiswhenitisactuallytrue.
B) ATypeIerrorisfailingtorejectthenullhypothesiswhenitisactuallyfalse.
C) ATypeIerrorisrejectingthenullhypothesiswhenitisactuallytrue.
Explanation
ATypeIErrorisdefinedasrejectingthenullhypothesiswhenitisactuallytrue.TheprobabilityofcommittingaTypeIerroris
theriskleveloralpharisk.
InordertotestifStockAismorevolatilethanStockB,pricesofbothstocksareobservedtoconstructthesamplevarianceofthetwo
stocks.Theappropriateteststatisticstocarryoutthetestisthe:
A) Ftest.
B) ttest.
C) Chisquaretest.
Explanation
TheFtestisusedtotestthedifferencesofvariancebetweentwosamples.
RyanMcKeelerandHowardHu,twojuniorstatisticians,werediscussingtherelationbetweenconfidenceintervalsand
hypothesistests.Duringtheirdiscussioneachofthemmadethefollowingstatement:
McKeeler:Aconfidenceintervalforatwotailedhypothesistestiscalculatedasaddingandsubtractingthe
productofthestandarderrorandthecriticalvaluefromthesamplestatistic.Forexample,foralevelof
confidenceof68%,thereisa32%probabilitythatthetruepopulationparameteriscontainedintheinterval.
Hu:A99%confidenceintervalusesacriticalvalueassociatedwithagivendistributionatthe1%levelof
significance.Ahypothesistestwouldcompareacalculatedteststatistictothatcriticalvalue.Assuch,the
confidenceintervalistherangefortheteststatisticwithinwhicharesearcherwouldnotrejectthenull
hypothesisforatwotailedhypothesistestaboutthevalueofthepopulationmeanoftherandomvariable.
WithrespecttothestatementsmadebyMcKeelerandHu:
A) bothareincorrect.
B) onlyoneiscorrect.
C) botharecorrect.
Explanation
McKeeler'sstatementisincorrect.Specifically,foralevelofconfidenceofsay,68%,thereisa68%probabilitythatthetrue
populationparameteriscontainedintheinterval.Therefore,thereisa32%probabilitythatthetruepopulationparameteris
notcontainedintheinterval.Hu'sstatementiscorrect.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
18 1.330 1.734 2.101 2.552 2.878 3.922
19 1.328 1.729 2.093 2.539 2.861 3.883
20 1.325 1.725 2.086 2.528 2.845 3.850
21 1.323 1.721 2.080 2.518 2.831 3.819
Inatwotailedhypothesistest,JackOlsonobservesatstatisticof1.38basedonasampleof20observationswherethe
populationmeaniszero.Ifyouchoosea5%significancelevel,youshould:
A) failtorejectthenullhypothesisthatthepopulationmeanisnotsignificantlydifferent
fromzero.
B) rejectthenullhypothesisandconcludethatthepopulationmeanisnot
significantlydifferentfromzero.
C) rejectthenullhypothesisandconcludethatthepopulationmeanissignificantly
differentfromzero.
Explanation
Ata5%significancelevel,thecriticaltstatisticusingtheStudent'stdistributiontableforatwotailedtestand19degreesof
freedom(samplesizeof20less1)is2.093(withalargesamplesizethecriticalzstatisticof1.960maybeused).Because
thecriticaltstatisticof2.093istotheleftofthecalculatedtstatisticof1.38,meaningthatthecalculatedtstatisticisnotin
therejectionrange,wefailtorejectthenullhypothesisthatthepopulationmeanisnotsignificantlydifferentfromzero.
A) 0.96.
B) 10.75.
C) 10.75.
Explanation
Withalargesamplesize(125)andanunknownpopulationvariance,eitherthetstatisticorthezstatisticcouldbeused.Using
thezstatistic,itiscalculatedbysubtractingthehypothesizedparameterfromtheparameterthathasbeenestimatedand
dividingthedifferencebythestandarderrorofthesamplestatistic.Theteststatistic=(samplemeanhypothesizedmean)/
(samplestandarddeviation/(samplesize1/2))=(X)/(s/n1/2)=(65,00062,500)/(2,600/1251/2)=(2,500)/(2,600/
11.18)=10.75.
BrianCibelievesthattheaveragereturnonequityintheairlineindustry,,islessthan5%.Whataretheappropriatenull(H0)
andalternative(Ha)hypothesestotestthisbelief?
A) H0:<0.05versusHa:0.05.
B) H0:<0.05versusHa:>0.05.
C) H0:0.05versusHa:<0.05.
Explanation
hewishestoreject(infavorofthealternative).Notethatthisisaonesidedalternativebecauseofthe"lessthan"belief.
InordertotestwhetherthemeanIQofemployeesinanorganizationisgreaterthan100,asampleof30employeesistaken
andthesamplevalueofthecomputedteststatistic,tn1=3.4.Thenullandalternativehypothesesare:
A) H0:X100Ha:X>100.
B) H0:100Ha:>100.
C) H0:=100Ha:100.
Explanation
Thenullhypothesisisthatthepopulationmeanislessthanorequaltofrom100.Thealternativehypothesisisthatthe
populationmeanisgreaterthan100.
JoSubelievesthatthereshouldbeanegativerelationbetweenreturnsandsystematicrisk.Sheintendstocollectdataon
returnsandsystematicrisktotestthistheory.Whatistheappropriatealternativehypothesis?
A) Ha:>0.
B) Ha:0.
C) Ha:<0.
Explanation
shewishestoreject(infavorofthealternative).Thetheoryinthiscaseisthatthecorrelationisnegative.
Whichofthefollowingstatementsaboutstatisticalresultsismostaccurate?
A) Ifaresultisstatisticallysignificantandeconomicallymeaningful,therelationshipwill
continueintothefuture.
B) Ifaresultisstatisticallysignificant,itmustalsobeeconomicallymeaningful.
C) Aresultmaybestatisticallysignificant,butmaynotbeeconomicallymeaningful.
Explanation
Itispossibleforaninvestigationtodeterminethatsomethingisbothstatisticallyandeconomicallysignificant.However,
statisticalsignificancedoesnotensureeconomicsignificance.Evenifaresultisbothstatisticallysignificantandeconomically
meaningful,theanalystneedstoexaminethereasonswhytheeconomicrelationshipexiststodiscernwhetheritislikelytobe
sustainedinthefuture.
Ananalystistestingtoseeifthemeanofapopulationislessthan133.Arandomsampleof50observationshadameanof
130.Assumeastandarddeviationof5.Thetestistobemadeatthe1%levelofsignificance.Theanalystshould:
A) failtorejectthenullhypothesis.
B) rejectthenullhypothesis.
C) acceptthenullhypothesis.
Explanation
Thenullhypothesisisthatthemeanisgreaterthanorequalto133.
Theteststatistic=(samplemeanhypothesizedmean)/((samplestandarddeviation/(samplesize)1/2))=(130133)/(5/
501/2)=(3)/(5/7.0711)=4.24.
Thecriticalvalueforaonetailedtestata1%levelofsignificanceis2.33.
Thecalculatedteststatisticof4.24fallstotheleftofthecriticalvalueof2.33,andisintherejectionregion.Thus,thenull
hypothesiscanberejectedatthe1%significancelevel.
Ananalystwantstodeterminewhetherthemonthlyreturnsontwostocksoverthelastyearwerethesameornot.Whattest
shouldsheuseifsheiswillingtoassumethatthereturnsarenormallydistributed?
A) Apairedcomparisonstestbecausethesamplesarenotindependent.
B) Adifferenceinmeanstestwithpooledvariancesfromthetwosamples.
C) Adifferenceinmeanstestonlyifthevariancesofmonthlyreturnsareequalforthe
twostocks.
Explanation
Apairedcomparisonstestmustbeused.Thedifferenceinmeanstestrequiresthatthesamplesbeindependent.Portfolio
theoryteachesusthatreturnsontwostocksoverthesametimeperiodareunlikelytobeindependentsincebothhavesome
systematicrisk.
df 0.100 0.050 0.025 0.01 0.005 0.0005
df 0.20 0.10 0.05 0.02 0.01 0.001
28 1.313 1.701 2.048 2.467 2.763 3.674
29 1.311 1.699 2.045 2.462 2.756 3.659
30 1.310 1.697 2.042 2.457 2.750 3.646
InordertotestifthemeanIQofemployeesinanorganizationisgreaterthan100,asampleof30employeesistakenandthe
samplevalueofthecomputedteststatistic,tn1=1.2.Ifyouchoosea5%significancelevelyoushould:
A) rejectthenullhypothesisandconcludethatthepopulationmeanisgreaterthan100.
B) failtorejectthenullhypothesisandconcludethatthepopulationmeanisgreaterthan100.
C) failtorejectthenullhypothesisandconcludethatthepopulationmeanisnotgreaterthan
100.
Explanation
Ata5%significancelevel,thecriticaltstatisticusingtheStudent'stdistributiontableforaonetailedtestand29degreesof
freedom(samplesizeof30less1)is1.699(withalargesamplesizethecriticalzstatisticof1.645maybeused).Becausethe
criticaltstatisticisgreaterthanthecalculatedtstatistic,meaningthatthecalculatedtstatisticisnotintherejectionrange,we
failtorejectthenullhypothesisandweconcludethatthepopulationmeanisnotsignificantlygreaterthan100.
JillWoodallbelievesthattheaveragereturnonequityintheretailindustry,,islessthan15%.Whatisnull(H0)and
alternative(Ha)hypothesisforherstudy?
A) H0:0.15versusHa:<0.15.
B) H0:=0.15versusHa:0.15.
C) H0:<0.15versusHa:=0.15.
Explanation
Thisisaonesidedalternativebecauseofthe"lessthan"belief.Weexpecttorejectthenull.
Aresearcheristestingthehypothesisthatapopulationmeanisequaltozero.Fromasamplewith64observations,the
researchercalculatesasamplemeanof2.5andasamplestandarddeviationof8.0.Atwhichlevelsofsignificanceshouldthe
researcherrejectthehypothesis?
1%significance 5%significance 10%significance
A) Reject Failtoreject Failtoreject
B) Failtoreject Failtoreject Reject
C) Failtoreject Reject Reject
Explanation
Thisisatwotailedtest.Withasamplesizegreaterthan30,usingaztestisacceptable.Theteststatistic= =2.5.
Foratwotailedztest,thecriticalvaluesare1.645fora10%significancelevel,1.96fora5%significancelevel,and2.58
fora1%significancelevel.Theresearchershouldrejectthehypothesisatthe10%and5%significancelevels,butfailtoreject
thehypothesisatthe1%significancelevel.
UsingStudent"stdistribution,thecriticalvaluesfor60degreesoffreedom(theclosestavailableinatypicaltable)are1.671
fora10%significancelevel,2.00fora5%significancelevel,and2.66fora1%significancelevel.Theresearchershould
rejectthehypothesisatthe10%and5%significancelevels,butfailtorejectthehypothesisatthe1%significancelevel.
Whichofthefollowingstatementsabouthypothesistestingismostaccurate?ATypeIerroristheprobabilityof:
A) rejectingatruenullhypothesis.
B) failingtorejectafalsehypothesis.
C) rejectingatruealternativehypothesis.
Explanation
TheTypeIerroristheerrorofrejectingthenullhypothesiswhen,infact,thenullistrue.
Giventhefollowinghypothesis:
ThenullhypothesisisH0:=5
ThealternativeisH1:5
Themeanofasampleof17is7
Thepopulationstandarddeviationis2.0
Whatisthecalculatedzstatistic?
A) 4.12.
B) 4.00.
C) 8.00.
Explanation
Thezstatisticiscalculatedbysubtractingthehypothesizedparameterfromtheparameterthathasbeenestimatedand
dividingthedifferencebythestandarderrorofthesamplestatistic.Here,theteststatistic=(samplemeanhypothesized
mean)/(populationstandarddeviation/(samplesize)1/2=(X)/(/n1/2)=(75)/(2/171/2)=(2)/(2/4.1231)=4.12.
JoeSuttonisevaluatingtheeffectsofthe1987marketdeclineonthevolumeoftrading.Specifically,hewantstotestwhether
thedeclineaffectedtradingvolume.Heselectedasampleof500companiesandcollecteddataonthetotalannualvolumefor
oneyearpriortothedeclineandforoneyearfollowingthedecline.WhatisthesetofhypothesesthatSuttonistesting?
A) H0:d=d0versusHa:d>d0.
B) H0:dd0versusHa:d=d0.
C) H0:d=d0versusHa:dd0.
Explanation
Thisisapairedcomparisonbecausethesamplecasesarenotindependent(i.e.,thereisabeforeandanafterforeach
stock).Notethatthetestistwotailed,ttest.
Whichoneofthefollowingbestcharacterizesthealternativehypothesis?Thealternativehypothesisisusuallythe:
A) hypothesisthatisacceptedafterastatisticaltestisconducted.
B) hopedforoutcome.
C) hypothesistobeprovedthroughstatisticaltesting.
Explanation
Thealternativehypothesisistypicallythehypothesisthataresearcherhopestosupportafterastatisticaltestiscarriedout.
Wecanrejectorfailtorejectthenull,not'prove'ahypothesis.
Aresearcheristestingwhethertheaverageageofemployeesinalargefirmisstatisticallydifferentfrom35years(either
aboveorbelow).Asampleisdrawnof250employeesandtheresearcherdeterminesthattheappropriatecriticalvalueforthe
teststatisticis1.96.Thevalueofthecomputedteststatisticis4.35.Giventhisinformation,whichofthefollowingstatementsis
leastaccurate?Thetest:
A) indicatesthattheresearcherwillrejectthenullhypothesis.
B) indicatesthattheresearcheris95%confidentthattheaverageemployeeageis
differentthan35years.
C) hasasignificancelevelof95%.
Explanation
Thistesthasasignificancelevelof5%.Therelationshipbetweenconfidenceandsignificanceis:significancelevel=1
confidencelevel.Weknowthatthesignificancelevelis5%becausethesamplesizeislargeandthecriticalvalueofthetest
statisticis1.96(2.5%ofprobabilityisinboththeupperandlowertails).
TheuseoftheFdistributedteststatistic,F=s12/s22,tocomparethevariancesoftwopopulationsdoesNOTrequirewhichof
thefollowing?
A) twosamplesareofthesamesize.
B) populationsarenormallydistributed.
C) samplesareindependentofoneanother.
Explanation
TheFstatisticcanbecomputedusingsamplesofdifferentsizes.Thatis,n1neednotbeequalton2.
peryear.Assuminganormaldistribution,whatistheteststatisticgivenasampleof115newlyacquiredCFAcharterholders
withameanstartingsalaryof$65,000andastandarddeviationof$4,500?
A) 19.06.
B) 19.06.
C) 1.78.
Explanation
(65,00057,000)/(4,500/1151/2)=(8,000)/(4,500/10.72)=19.06.
Apvalueof0.02%meansthataresearcher:
A) cannotrejectthenullhypothesisateitherthe5%or1%significancelevels.
B) canrejectthenullhypothesisatthe5%significancelevelbutcannotrejectatthe1%
significancelevel.
C) canrejectthenullhypothesisatboththe5%and1%significancelevels.
Explanation
Apvalueof0.02%meansthatthesmallestsignificancelevelatwhichthehypothesiscanberejectedis0.0002,whichis
smallerthan0.05or0.01.Thereforethenullhypothesiscanberejectedatboththe5%and1%significancelevels.
Abottleroficedteawishestoensurethatanaverageof16ouncesofteaisineachbottle.Inordertoanalyzetheaccuracyof
thebottlingprocess,arandomsampleof150bottlesistaken.Usingatdistributedteststatisticof1.09anda5%levelof
significance,thebottlershould:
A) notrejectthenullhypothesisandconcludethatbottlescontainanaverage16
ouncesoftea.
B) rejectthenullhypothesisandconcludethatbottlescontainanaverage16ouncesof
tea.
C) notrejectthenullhypothesisandconcludethatbottlesdonotcontainanaverageof
16ouncesoftea.
Explanation
Ho:=16Ha:16.Donotrejectthenullsince|t|=1.09<1.96(criticalvalue).
Ananalystconductsatwotailedtesttodetermineifmeanearningsestimatesaresignificantlydifferentfromreported
earnings.Thesamplesizeisgreaterthan25andthecomputedteststatisticis1.25.Usinga5%significancelevel,whichof
thefollowingstatementsismostaccurate?
A) Theanalystshouldrejectthenullhypothesisandconcludethattheearnings
estimatesaresignificantlydifferentfromreportedearnings.
B) Theanalystshouldfailtorejectthenullhypothesisandconcludethattheearnings
estimatesarenotsignificantlydifferentfromreportedearnings.
C) Totestthenullhypothesis,theanalystmustdeterminetheexactsamplesizeand
calculatethedegreesoffreedomforthetest.
Explanation
Thenullhypothesisisthatearningsestimatesareequaltoreportedearnings.Torejectthenullhypothesis,thecalculatedtest
statisticmustfalloutsidethetwocriticalvalues.IFtheanalystteststhenullhypothesiswithazstatistic,thecrticalvaluesata
5%confidencelevelare1.96.Becausethecalculatedteststatistic,1.25,liesbetweenthetwocriticalvalues,theanalyst
shouldfailtorejectthenullhypothesisandconcludethatearningsestimatesarenotsignificantlydifferentfromreported
earnings.Iftheanalystusesatstatistic,theuppercriticalvaluewillbeevengreaterthan1.96,neverless,soevenwithoutthe
exactdegreesoffreedomtheanalystknowsanyttestwouldfailtorejectthenull.
KyraMosby,M.D.,hasapatientwhoiscomplainingofsevereabdominalpain.Basedonanexaminationandtheresultsfromlaboratory
tests,Mosbystatesthefollowingdiagnosishypothesis:Ho:Appendicitis,HA :NotAppendicitis.Dr.Mosbyremovesthepatient'sappendix
andthepatientstillcomplainsofpain.Subsequenttestsshowthatthegallbladderwascausingtheproblem.Bytakingoutthepatient's
appendix,Dr.Mosby:
A) madeaTypeIIerror.
B) iscorrect.
C) madeaTypeIerror.
Explanation
ThisstatementisanexampleofaTypeIIerror,whichoccurswhenyoufailtorejectahypothesiswhenitisactuallyfalse(alsoknownas
thepowerofthetest).
Theotherstatementsareincorrect.ATypeIerroristherejectionofahypothesiswhenitisactuallytrue(alsoknownasthesignificance
levelofthetest).
RobertPatterson,anoptionstrader,believesthatthereturnonoptionstradingishigheronMondaysthanonotherdays.Inordertotest
histheory,heformulatesanullhypothesis.Whichofthefollowingwouldbeanappropriatenullhypothesis?ReturnsonMondaysare:
A) notgreaterthanreturnsonotherdays.
B) greaterthanreturnsonotherdays.
C) lessthanreturnsonotherdays.
Explanation
Anappropriatenullhypothesisisonethattheresearcherwantstoreject.IfPattersonbelievesthatthereturnsonMondaysaregreater
thanonotherdays,hewouldliketorejectthehypothesisthattheoppositeistruethatreturnsonMondaysarenotgreaterthanreturnson
otherdays.
Whichofthefollowingisthecorrectsequenceofeventsfortestingahypothesis?
A) Statethehypothesis,formulatethedecisionrule,selectthelevelof
significance,computetheteststatistic,andmakeadecision.
B) Statethehypothesis,selectthelevelofsignificance,computetheteststatistic,
formulatethedecisionrule,andmakeadecision.
C) Statethehypothesis,selectthelevelofsignificance,formulatethedecisionrule,
computetheteststatistic,andmakeadecision.
Explanation
Dependingupontheauthortherecanbeasmanyassevenstepsinhypothesistestingwhichare:
1. Statingthehypotheses.
2. Identifyingtheteststatisticanditsprobabilitydistribution.
3. Specifyingthesignificancelevel.
4. Statingthedecisionrule.
5. Collectingthedataandperformingthecalculations.
6. Makingthestatisticaldecision.
7. Makingtheeconomicorinvestmentdecision.
ATypeIIerror:
A) failstorejectafalsenullhypothesis.
B) rejectsatruenullhypothesis.
C) failstorejectatruenullhypothesis.
Explanation
ATypeIIerrorisdefinedasacceptingthenullhypothesiswhenitisactuallyfalse.ThechanceofmakingaTypeIIerroris
calledbetarisk.
Ananalystistestingthehypothesisthatthemeanexcessreturnfromatradingstrategyislessthanorequaltozero.The
analystreportsthatthishypothesistestproducesapvalueof0.034.Thisresultmostlikelysuggeststhatthe:
A) smallestsignificancelevelatwhichthenullhypothesiscanberejectedis6.8%.
B) bestestimateofthemeanexcessreturnproducedbythestrategyis3.4%.
C) nullhypothesiscanberejectedatthe5%significancelevel.
Explanation
Apvalueof0.035meansthehypothesiscanberejectedatasignificancelevelof3.5%orhigher.Thus,thehypothesiscanbe
rejectedatthe10%or5%significancelevel,butcannotberejectedatthe1%significancelevel.
InordertotestifthemeanIQofemployeesinanorganizationisgreaterthan100,asampleof30employeesistaken.The
samplevalueofthecomputedzstatistic=3.4.Theappropriatedecisionata5%significancelevelisto:
A) rejectthenullhypothesesandconcludethatthepopulationmeanisgreater
than100.
B) rejectthenullhypothesisandconcludethatthepopulationmeanisequalto100.
C) rejectthenullhypothesisandconcludethatthepopulationmeanisnotequalto100.
Explanation
Ho:100Ha:>100.Rejectthenullsincez=3.4>1.65(criticalvalue).
Whichofthefollowingstatementsregardinghypothesistestingisleastaccurate?
A) AtypeIerrorisacceptanceofahypothesisthatisactuallyfalse.
B) AtypeIIerroristheacceptanceofahypothesisthatisactuallyfalse.
C) ThesignificancelevelistheriskofmakingatypeIerror.
Explanation
AtypeIerroristherejectionofahypothesisthatisactuallytrue.
Ofthefollowingexplanations,whichisleastlikelytobeavalidexplanationfordivergencebetweenstatisticalsignificanceand
economicsignificance?
A) Adjustmentforrisk.
B) Transactionscosts.
C) Dataerrors.
Explanation
Whiledataerrorswouldcertainlycometobearontheanalysis,intheirpresencewewouldnotbeabletoasserteither
statisticaloreconomicsignificance.Inotherwords,dataerrorsarenotavalidexplanation.Theothersareallmitigatingfactors
thatcancausestatisticallysignificantresultstobelessthaneconomicallysignificant.
Givenameanof10%andastandarddeviationof14%,whatisa95%confidenceintervalforthereturnnextyear?
A) 17.44%to37.44%.
B) 4.00%to24.00%.
C) 17.00%to38.00%.
Explanation
10%+/14(1.96)=17.44%to37.44%.
Inatestofthemeanofapopulation,ifthepopulationvarianceis:
A) known,atdistributedteststatisticisappropriate.
B) known,azdistributedteststatisticisappropriate.
C) unknown,azdistributedteststatisticisappropriate.
Explanation
Ifthepopulationsampledhasaknownvariance,theztestisthecorrecttesttouse.Ingeneral,attestisusedtotestthe
meanofapopulationwhenthepopulationvarianceisunknown.Notethatinspecialcaseswhenthesampleisextremely
large,theztestmaybeusedinplaceofthettest,butthettestisconsideredtobethetestofchoicewhenthepopulation
varianceisunknown.
Thevarianceof100dailystockreturnsforStockAis0.0078.Thevarianceof90dailystockreturnsforStockBis0.0083.
Usinga5%levelofsignificance,thecriticalvalueforthistestis1.61.Themostappropriateconclusionregardingwhetherthe
varianceofStockAisdifferentfromthevarianceofStockBisthatthe:
A) variancesareequal.
B) variancesarenotequal.
C) varianceofStockBissignificantlygreaterthanthevarianceofStockA.
Explanation
AtestoftheequalityofvariancesrequiresanFstatistic.ThecalculatedFstatisticis0.0083/0.0078=1.064.Sincethe
calculatedFvalueof1.064islessthanthecriticalFvalueof1.61,wecannotrejectthenullhypothesisthatthevariancesof
the2stocksareequal.
Whichofthefollowingisanaccurateformulationofnullandalternativehypotheses?
A) Greaterthanforthenullandlessthanorequaltoforthealternative.
B) Lessthanforthenullandgreaterthanforthealternative.
C) Equaltoforthenullandnotequaltoforthealternative.
Explanation
Acorrectlyformulatedsetofhypotheseswillhavethe"equalto"conditioninthenullhypothesis.
IftheprobabilityofaTypeIerrordecreases,thentheprobabilityof:
A) aTypeIIerrorincreases.
B) incorrectlyrejectingthenullincreases.
C) incorrectlyacceptingthenulldecreases.
Explanation
IfP(TypeIerror)decreases,thenP(TypeIIerror)increases.Anullhypothesisisneveraccepted.Wecanonlyfailtorejectthenull.

07 Hypothesis Testing

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HypothesisTesting TestID:7658784

z 0.04 0.05 0.06 0.07 0.08 0.09

11 1.363 1.796 2.201 2.718 3.106 4.437

Distribution Variance n One Two Three

Nonnormal 0.75 100 z z z

Nonnormal n/a 15 t t none

Nonnormal 14.3 15 z t none

Whenyouaresamplingfroma: andthesamplesizeissmall, andthesamplesizeislarge,

1%significance 5%significance 10%significance

A) Reject Failtoreject Failtoreject

B) Failtoreject Failtoreject Reject

C) Failtoreject Reject Reject

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