Financial Risk Manager Part 1

Explanation

This is a hypothesis testing question about setting up null and alternative hypotheses for a one-sided test.

Key Points:

• Hilda believes the average return on equity is greater than 80% (M > 0.8)
• This is a one-sided test since we're testing specifically for values greater than 80%
• The null hypothesis (H₀) should represent the status quo or the claim we're testing against
• The alternative hypothesis (H₁) represents Hilda's belief

Correct Setup:

• H₀: M ≤ 0.8 (null hypothesis - average return is less than or equal to 80%)
• H₁: M > 0.8 (alternative hypothesis - average return is greater than 80%)

Why Option C is correct:

• The null hypothesis should contain the equality (≤) and represent the opposite of what Hilda believes
• The alternative hypothesis should reflect Hilda's specific belief (M > 0.8)
• This is a right-tailed test since we're testing if the mean is greater than the hypothesized value

Why other options are incorrect:

• Option A: Two-tailed test (≠), not appropriate for directional belief
• Option B: Tests if mean is less than 80%, opposite of what Hilda believes
• Option D: Null hypothesis doesn't contain equality, which is standard practice in hypothesis testing