CFA Practice Question

CFA Practice Question

A portfolio manager pursues an active strategy. Over a period of 12 months, she achieves a return of 0.95% per month. The risk of her portfolio implies her return should be 0.75% per month. The sample standard deviation is 1.29%. The Null Hypothesis is that the portfolio manager earns a return equal to or lower than 0.75% per month? (That is alpha is zero or negative). What is the test statistic for a 99% level of significance test?
A. t-distributed with 12 dof test statistic for 1% one-tailed = 2.681.
B. Z-distributed test statistic for 1% one-tailed = 2.326.
C. t-distributed with 11 dof test statistic for 1% one-tailed = 2.718.
Explanation: As we have the sample standard deviation (rather than the population standard deviation), as the sample size is relatively small (12 months) we should use the t-distribution rather than the Z-distribution. Also degrees of freedom will be 12 - 1 = 11.

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