PS2_Soln - Prasad Krishnamurthy Suggested Solutions for PS2...

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Prasad Krishnamurthy Suggested Solutions for PS2 Problems 3.7 and 3.12 October 1, 2009 Problem 3.7 (a) Firm Test Microsoft Reject Null GE Fail to Reject Null GM Fail to Reject Null IBM Fail to Reject Null Disney Fail to Reject Null Mobil-Exxon Reject Null We describe the results in gory detail for Microsoft. We reject at the 5% level the hypothesis that the beta of Microsoft stock is equal to one against the alternative hypothesis that it is not equal to one. We do so because the p-value say that, if the null is true, this is a procedure that will reject the null (even though it is true) 5% of the time. We interpret the p-value as follows. If the null is true, then the probability that this procedure would deliver an estimate of beta that is this far from the null is .0241. It is incorrect to say that, in this particular instance, there is a proba- bility of .0241 that the null is true. In any particular instance, the null is either
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PS2_Soln - Prasad Krishnamurthy Suggested Solutions for PS2...

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