Page 28 - FINAL CFA I SLIDES JUNE 2019 DAY 4

Session Unit 3:

12. Hypothesis Testing
LOS 12.h: Identify the appropriate TS and interpret the results for a HT concerning the equality of the population means of 2 at least
approximately normally distributed populations, based on independent random samples with 1) equal or 2) unequal assumed variances,

Example: Difference between means – equal variances: Sue Smith is investigating whether the abnormal returns for acquiring firms
during merger announcement periods differ for horizontal and vertical mergers. She estimates the abnormal returns for a sample of
acquiring firms associated with horizontal mergers, and those involved in vertical mergers and reported the following:

Smith assumes that the samples are independent (e.g. 2 different industries), the
population means are normally distributed, and the population variances are equal.

Smith must calculate t-statistic. Result is –7.3739! How?

= (64-1)0.0001 + (81-1)0.0004 = 0.0003
64+81-2

= 0.01 – 0.025 = - 7.3739! And the df =
0.0003/64 + 0.0003/81 n1+n2-2 = 64 + 81 – 2 = 143!)

How should Smith Decide?

df = n1+n2-2 = 64 + 81 – 2 = 143!, and say 95% confidence (5% SL);
Lets go to t tables!