Explanation:
The analyst's supervisor states that "the mean 1-year Treasury bill rate should equal four percent." Therefore, the null hypothesis is: H₀: mean Treasury bill rate equals 4%; and the alternative hypothesis is Hₐ: mean Treasury bill rate does not equal 4%, which is a two-tailed test. The analyst's supervisor also states that "the mean market risk premium should be positive." Therefore, the null hypothesis is: H₀: mean market risk premium is less than or equal to zero; and the alternative hypothesis is Hₐ: mean market risk premium is greater than zero, which is a one-tailed test.
(Book 2, Module 17.1, LO 17.b)
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Question 70
As a research analyst at his firm, an analyst is assigned the task of examining the relevance of the capital asset pricing model by running hypothesis tests on the risk-free rate and the market risk premium. The analyst's supervisor makes the following statement: "For the CAPM to be valid, the mean 1-year Treasury bill rate should equal 4% and the mean market risk premium should be positive." The analyst collects historical rates of return data for 1-year Treasury bills and for the annual market risk premiums over the past 30 years. He then conducts tests of hypotheses using the historical Treasury bill and market risk premium data. To examine the claims of his supervisor, identify whether the research analyst should perform one-tailed or two-tailed tests of these hypotheses.
A
Risk-free rate hypothesis: One-tailed test | Market risk premium hypothesis: One-tailed test
B
Risk-free rate hypothesis: One-tailed test | Market risk premium hypothesis: Two-tailed test
C
Risk-free rate hypothesis: Two-tailed test | Market risk premium hypothesis: One-tailed test
D
Risk-free rate hypothesis: Two-tailed test | Market risk premium hypothesis: Two-tailed test
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