- CFA Exams
- CFA Level I Exam
- Study Session 3. Quantitative Methods (2)
- Reading 11. Hypothesis Testing
- Subject 3. Test Statistic and Significance Level

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**CFA Practice Question**

A consumer group wants to prove that average hospital costs are more than $931 per day. The group randomly samples 60 accounts and finds a sample mean of $950. The hypothesis test is at an α-level of 5% and assumes a σ of $50. The critical value is ______ standard deviations.

B. -1.645

C. 1.28

A. 1.645

B. -1.645

C. 1.28

Correct Answer: A

The rejection/critical region is the top percent of the normal distribution. The α-level is 5%, so the critical value is the cutoff for the top 5%, 1.645 standard deviations above the mean. Note that the only way we can reject H

_{0}: μ < 931 is for the x-bar to be too far above 931.###
**User Contributed Comments**
7

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

Bibhu |
One can refer to www.mathsnet.net/asa2/modules/s33binom.html for further reading on this subject. The easier way is sample mean 950 above 931. So +Z and then 5% means 1.645. |

whiteknight |
we can approach the problem like this...for 5% level of significance in a one tail test the z value is 1.645...i.e the right hand portion of the normal distribution....thus for any Z greater than 1.645 this statement will hold true ... |

raymondg |
could somebodyplease explain how to arrive to 1.645 ? |

meghanchloe |
I THOUGHT 5% LEVEL OF SIGNIFICANT IS 1.96 |

ebayer |
5% one tail = 10% both tails -> use 1.645 instead of 1.96. |

johntan1979 |
This test is clearly one-tailed (>931). So answer should be 1.645 if alpha is .05. two-tailed would be 1.96. |

Sp1993 |
Hi johntan1979, could you please clarify why a two-tailed test would give an answer of 1.96! Thanks! |