7.04.2005

Q&A: An analyst is trying to prove that the annualized return of S&P 500...

...is greater than 15%. Explain how a Type I and Type II errors could have been made.

  • H(0) = d <= 15%, H(1) = u > 15%
  • Type I: Concluding that the return is greater than 15% when in fact it's less than 15%.
  • Type II: Going along with the return is less than 15% when in fact it's greater than 15%.

Bonus Points

  • A Type I error is rejecting H0 when H0 is in fact true.
  • A Type II error is failing to reject H0 when H0 is in fact false.
  • "Going along" means you can't conclude nor reject it.

Category: Quantitative Analysis

Category: C++ Quant > Finance

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