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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
MobilExxon
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 pvalue
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 pvalue 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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 Fall '08
 DUNCAN
 Econometrics

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