Financial Risk Manager Part 1
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An analyst wishes to establish the relationship between corporate revenue (Yₜ) and the average years of experience per employee (Xₜ) and comes up with the following model.
Yₜ = 0.45 + 0.78Xₜ
The analyst also observes that the standard error of the coefficient of the average years of experience per employee is 0.65. In order to test the null hypothesis that the average years of experience per employee have no effect on corporate revenue, what is the correct statistic to calculate?
Other
Community
NNikitesh
A
F-test
B
t-test
C
Chi-square test
D
Durbin Watson test
Explanation:
In both single and multiple regression, we use the t-test to determine whether a specific independent variable has a significant effect on the dependent variable at a given level of confidence. If we take the coefficient of the average years of experience per employee to be β₁, then the test would be formulated as follows:
H₀: β₁ = 0
H₁: β₁ ≠ 0
In this case, the test statistic would be computed as follows:
t = (estimated value of β₁ - value of β₁ under H₀) / standard error of estimated value of β₁
t = (0.78 - 0) / 0.65 = 1.2
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