CFA Practice Question

There are 434 practice questions for this study session.

CFA Practice Question

An analyst compiled the following information relating to EPS forecasts. The analyst wants to forecast quality. The test used to forecast quality is the zero-mean test, which states that optimal forecasts should have a mean forecasting error of 0.

Number of forecasts: 100
Mean forecast error: 0.07
Standard deviation of forecast error: 0.2

Using a z-test, at the 0.05 level of significance ______

A. we reject the null.
B. we have committed a Type I error.
C. we accept the null.
Correct Answer: A

Z = (0.07 - 0)/(0.2/1001/2) = 3.5.

Note that the calculation of the z-statistic with unknown variance is the same as the calculation of the t-statistic. When the significance level is 0.05 the rejection points are Z > 1.96 and Z < -1.96. The computed value of Z of 3.5 is greater than 1.96; this means we reject the null at the 0.05 level.

User Contributed Comments 9

User Comment
tenny45 Didn't question #4 just mention that at the 0.05 significance level, the critical value is 1.645 (instead of 1.96)?
nick q4 is 10% confidence interval, but 5% for the bottom part.
awellman 1.645 is the one-tailed critical value. 1.96 is the two-tailed critical value.
sapphire Does anybody know how to get 1.96 besides memorising it? Thanks a lot
StanleyMo is that the = and < > can affect the 5% or 10% level of significance?
thekid Sapphire...

we know:
alpha=5% and its a one sided test.

Therefore, looking at the z tables we look for the value 5% (0.05)... and we find that z -1.64 has a value of 5.05% (0.0505) and z -1.65 has a value of 4.95% (0.0495). Therefore, a z of 1.645 would give us a value of 5%.

If this was a two sided test with the same alpha=5%, Then you would look at the z table for a zscore with a value of 0.025 (5%/2) and if you look at the the z -1.96 it has a value of 0.025 (the value we are looking for). (Since its the same on the other tail z +1.96 = z -1.96)

Summary:
Given alpha=5%, with a 1sided test: 5% on EACH SIDE therefore 90% = Zscore of 1.645, with a 2sided test: (2.5%) 5%/2 on each side therefore 95% = Zscore of 1.96
johntan1979 sapphire, you can write it on a piece of paper and bring it into the exam.
gill15 thekid --- this is a TWO SIDED test.....thats why the answer has 1.96 in it..

optimal forecating is u = 0
Ha u does NOT equal 0 ---- two sided test
sumeetb Yes, gill15, Its a 2-tail test. My doubt is: then, do we take significance level as 10% or keep it 5? Pls help
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