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Answer: Reject H₀: μ = 0%
Since the quantitative analyst wants to test if the returns are different from zero, the appropriate hypotheses are H₀: μ = 0% and H₁: μ ≠ 0%. The decision rule is to reject H₀ if the test statistic > the upper critical value OR if the test statistic < the lower critical value. At a 5% level of significance, the z-critical value is +/- 1.96. Test statistic = (Sample mean - Hypothesized value) / (Standard deviation / √Sample size) = (1% - 0%) / (2% / √110) = 5.24 Since the test statistic > the upper critical value (or 5.24 > 1.96), the null hypothesis is rejected and the alternative hypothesis is accepted.
Author: Nikitesh Somanthe
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A quantitative analyst has calculated the mean HPR of 1% for 110 European corporate bonds with the standard deviation of 2%. If the analyst wants to test at a 5% level of significance that the mean HPR on European corporate bonds is different from zero, then which of the following is the most accurate result of the test?
A
Reject H₀: μ = 0%
B
Reject H₁: μ ≠ 0%
C
Accept H₀: μ ≠ 0%
D
Accept H₁: μ < 0%