- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 8. Hypothesis Testing
- Subject 1. The Process of Hypothesis Testing

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**CFA Practice Question**

A homeowner claims that the current market value of his house is at least $400,000. Sixty real estate agents were asked independently to estimate the house's value. The hypothesis test that followed ended with a decision of "reject H0." Which of the following statements accurately states the conclusion?

B. The homeowner is right; the house is worth less than $400,000.

C. The homeowner is wrong; the house is worth less than $400,000.

A. The homeowner is right; the house is worth $400,000.

B. The homeowner is right; the house is worth less than $400,000.

C. The homeowner is wrong; the house is worth less than $400,000.

Correct Answer: C

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**User Contributed Comments**
12

User |
Comment |
---|---|

mtcfa |
IS this right? Since the item of significance is that the house is greater than or equal to $40k, then isn't this the alternative hypothesis. The null would therefore be that the house is worth less than $40k. If we reject the null, then the home-owner is correct. |

poker |
yes it is correct. The null hypothesis is the homeowner's statement: >= 400,000. Since the null is rejected, we can safely say it's less than 400k. |

thekid |
I would have to agree with 'Mtcfa' I thought the H1(alternative) would be what someone is claiming. Therefore, in this case: homeowner claiming his house is worth 400,000 or more... so H1 = $House >= 400,000. & the Ho = $House < 400,000. And since we REJECT Ho...we must accept H1 SOMEONE PLEASE CLARIFY!!! |

gazza77 |
the home owner claims Ho: $house >= $400k therefore H1: $house < $400k if Ho: Reject Accept H1: $house < $400k |

dcfa |
I would agree with mtcfa and thekid - you formulate the null hypothesis so that you can reject null and accept the alternative |

DonAnd |
gazaa77 is absolutely right |

cfaeater |
What are the objectives of the real estate agents? To side with the owner, or against him? If they'd rather not see that the home is is worth at least they'd take a Ha: Home<$400,000 wouldn't they, so then the question above makes sense... But if they're with the owner and like to test to see if the home is above $400,000 then they'd take a Ha: Home>$400,000... |

bantoo |
What is the null-hypothesis? It is the statement that is to be tested. Now, what is to be tested here? Obviously, the veracity of the claim of houseowner: This house is > and = 400000 SO Our job is to reject the null hypthesis and it has been rejected. So houseowner's claim is wrong. |

NikolaZ |
Null Hypothesis: House is worth at $400K or more Alternate Hypothesis: House is worth less than $400K Null rejected in favor of alternate |

johntan1979 |
Guys and gals, think carefully here. This question requires more thought that jumping straight into conclusions. I agree with cfaeater, that you must think about whose side is testing the hypothesis. The agents wants to believe that the house is < $400K. If the null (agent's) is rejected, then the house is < $400K is valid. Owner is wrong. C is correct answer. |

ashish100 |
what an annoying ass question |

dbedford |
The null hypothesis is the benchmark for reality and without testing we assume the homeowner statement as the bench mark i.e. The null hypothesis. So when it is rejected means that his thought was not the case |