- CFA Exams
- CFA Level I Exam
- Study Session 3. Quantitative Methods (2)
- Reading 11. Hypothesis Testing
- Subject 1. Introduction

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**CFA Practice Question**

Armando Delrio, a quantitative analyst with Brown Brothers Brokerage, has been instructed to create a regression analysis comparing the relationship between same store sales figures for a batch of retail stocks and marketing expenses for the same series of stocks. In order to adhere to the traditional seven-step method of hypothesis testing, Armando should begin his analysis by performing which of the following actions? Choose the best answer.

A. collecting the data

B. formulating the hypothesis

C. identifying the test statistic

**Explanation:**Hypothesis testing involves a series of seven explicit steps:

Step 1: Formulating and stating the hypothesis

Step 2: Identifying the appropriate test statistic and its probability distribution

Step 3: Specifying the significance level

Step 4: Stating the decision rule

Step 5: Collecting the data and performing the necessary calculations

Step 6: Making the statistical decision

Step 7: Making the economic/investment decision.

In this example, Armando Delrio, a quantitative analyst, has been instructed to perform a regression analysis in which a hypothesis is tested. The first step in this process is the formulation of the hypothesis.

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