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Category: Level I Quantitative Methods
Hypothesis Testing – Step 3: Specify the Level of Significance
There are eight articles on hypothesis testing: Synopsis Step 1: State the hypotheses Step 2: Select the appropriate test statistic Step 3: Specify the level of significance (you are here) Step 4: State the decision rule for testing the null hypothesis Step 5: Collect the sample data and calculate the value of the test statistic…
Hypothesis Testing – Step 2: Select the Appropriate Test Statistic
There are eight articles on hypothesis testing: Synopsis Step 1: State the hypotheses Step 2: Select the appropriate test statistic (you are here) Step 3: Specify the level of significance Step 4: State the decision rule for testing the null hypothesis Step 5: Collect the sample data and calculate the value of the test statistic…
Hypothesis Testing – Step 1: State the Hypotheses
There are eight articles on hypothesis testing: Synopsis Step 1: State the hypotheses (you are here) Step 2: Select the appropriate test statistic Step 3: Specify the level of significance Step 4: State the decision rule for testing the null hypothesis Step 5: Collect the sample data and calculate the value of the test statistic…
Normal Distribution
Before reading this article, make sure that you have read the article on probability distributions in general. The normal (or Gaussian) probability distribution is arguably the most important continuous distribution used in probability and statistics; it is certainly the most important continuous probability distribution appearing in the CFA curriculum. There are several reasons for its…
Degrees of Freedom
Suppose that, for reasons known only to yourself and your therapist, you need to know the average height of all giraffes in the world. Desperately. You face a number of obstacles, not the least of which is that there are estimated to be about 80,000 giraffes in the world, and giraffes are notoriously difficult to…
Student’s t-Distribution
Before reading this article, make sure that you have read the article on probability distributions in general. The Student’s t-distribution has an interesting history. It was developed by a gentleman who worked for Guinness Breweries in Dublin, Ireland, who used it for statistical tests on the ingredients for Guinness beer; apparently Guinness preferred that their…
Confidence Intervals
A confidence interval is nothing more than a range in which we hope (and, with some probability, expect) some value to lie. For our purposes, the values for which we will construct confidence intervals will be parameters for probability distributions. Specifically, we’ll construct confidence intervals for: The mean of a (given) probability distribution (population) An…
Covariance and Correlation
Covariance Covariance is just an extension of the idea of variance: instead of looking at how numbers in one data set deviate from their mean, you look at how numbers in two data sets deviate from their respective means together. We start with the formula for variance (of a population): \[\sigma^2\ =\ \frac{\sum_{i=1}^N \left(X_i\ –\…
Nominal vs. Effective Interest Rates
The ideas behind nominal and effective interest rates are fairly simple, but you need to be sure that you understand the differences, and that you know which convention is used for which common rate quotes. At the heart of the difference is the idea of compound interest, so let’s start there. Throughout this article, we’ll…
Comparing Yield Measures (Quant)
The article on yield measures mentions five measures of interest: Bank Discount Yield (BDY, or rBD) Holding Period Yield (HPY) Effective Annual Yield (EAY) Money Market Yield (MMY or rMM) Bond Equivalent Yield (BEY) Unfortunately, you cannot compare these to each other directly; for example, if one investment has a BEY of 6.125% and another…