As the head of a trading desk at a major bank, it is your job to evaluate whether the superior performance of a trader is due to skill or luck. To test this, you set up the following hypothesis:
Ho: Expected excess returns = 0 -
H1: Expected excess returns > 0 -
The excess returns are returns adjusted for risk using a proprietary factor model. In this set-up, which of the following is/are true?
I. You must employ a one-tailed test.
II. H1 is a directional alternative.
III. Your critical z-statistics will be larger than the z-statistics in the case where the alternative is specified as H1: Excess returns are non-zero.
Click on the arrows to vote for the correct answer
A. B. C. D. E. F. G.D
The alternative hypothesis, H1, does not assign a specific value to the expected excess return but specifies a directional region. Since it specifies the region to the right of 0 as an alternative, he must employ a right-tailed test i.e. a one-sided test. Note that the critical z-statistics in one-tailed regressions are always lower than the z-statistics in the corresponding two-tailed test.