finance multi-part question and need the explanation and answer to help me learn.

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FIN 617 Fall 2023 Exam 2

To get full credits, you need to show your steps for each problem.

(1pt) In a trial a jury must decide between two hypotheses:

The accused individual is innocent

The accused individual is guilty

What is the type I error and type II error in this hypothesis test? Which error is considered more serious in the U.S. judicial system?

(3pt) Assume that the equity risk premium is normally distributed with a population mean of 9 percent and a population standard deviation of 25 percent. Over the last three years, equity returns (relative to the risk-free rate) have averaged −3.0 percent. You have a large client who is very upset and claims that results this poor should never occur. Evaluate your client’s concerns.

Construct a 90 percent confidence interval around the population mean for a sample of three-year returns.

What is the probability of a −3.0 percent or lower average return over a three-year period?

Your client claims an average return of 11 percent or higher is desirable, what is the probability of a 11 percent of higher average return over a three-year period?

(2pt) ABC is a company in a high technology industry. During the most recent industry cycle, its averaged revenue is $20 million per year with a standard deviation of $8 million (n = 10 observations). Management claims that ABC’s performance during the most recent cycle results from new approaches and that we can dismiss profitability expectations based on its average revenues of $16 million per year in prior cycles.

Let represents the average revenue of ABC, formulate the null hypothesis and alternative hypothesis consistent with testing management team’s claim.

Assuming that ABC’ revenue is at least approximately normally distributed, determine whether or not to reject the null hypothesis at 0.05 significance level.

(2pt) During a 12-year period, the standard deviation of annual returns on a portfolio you are analyzing was 14 percent a year. You want to see whether this record is sufficient evidence to support the conclusion that the portfolio’s underlying variance of return was less than 324, the return variance of the portfolio’s benchmark.

Formulate null and alternative hypotheses consistent with the verbal description of your objective.

Determine whether or not the null hypothesis is rejected at 0.05 significance level.

(3pt) You are examining the results of a regression estimate that attempts to explain the inflation rate of different countries. The ANOVA output is given in the table below. The number of observations is 6 countries.

What hypothesis does the F statistic test?

Is the F test significant at 0.05 significance level?

Calculate the based on ANOVA table and explain the meaning of .

(2pt) Below are the regression results using the money supply growth rate as the independent variable and the inflation rate as the dependent variable for different countries.

Based on the regression, if the money supply growth rate increase by 2%, how much do you expect the inflation rate to increase? (Or decrease?)

Construct the 95% confidence interval of the coefficient on the money supply growth rate.

(2pt) Explain why in the multiple regression model, is not a good measure for goodness of fit. What is the alternative measure should we use in replace of ?

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December 4, 2023

December 4, 2023