On a given day stock market prices respond to

Info icon This preview shows pages 2–4. Sign up to view the full content.

View Full Document Right Arrow Icon
On a given day, stock market prices respond to information about the general economy and therefore, it may be expected that the returns for an individual company may be correlated with the overall performance of the market. That is, a non-zero covariance between the x and y observations is realistic. The task of interest is to obtain a confidence interval estimate for the difference between the mean return for the company and the mean return for the market portfolio. The differences are generated as: i i i y x d - = for i = 1, 2, . . . , 20 The sample mean and standard deviation of the differences were calculated as: 0.173 - = d and 1.391 = d s The negative value for d says that the sample mean for the company returns is less than the sample mean for the market returns. This does not imply that this is the case for the population – the population means are unknown.
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Econ 325 – Chapter 8 5 For the purpose of the exercise, set the confidence level to 0.95. A 95% interval estimate is: n s t d d c ± An illustration of the t-distribution critical value c t is below. PDF of ) 19 ( t tc 0 -tc Area = 0.95 Upper Tail Area = 0.05 / 2 = 0.025 Lower Tail Area = 0.025 To look-up the critical value from the Appendix Table for the t-distribution select the degrees of freedom ( n - 1 ) = 19, and set the upper tail area to 0.025. To check the method, with Microsoft Excel select Insert Function: TINV(0.05, 19) This returns the answer: 2.093 = c t Econ 325 – Chapter 8 6 By using the numerical results, the 95% interval estimate for the difference in population mean returns for the company and the market is calculated as: 20 1.391 2.093 0.173 ± - This gives the lower and upper limits: [ 0.48 0.82 , - ] head2right Note that the interval contains the value zero (the lower limit is negative and the upper limit is positive). This suggests the possibility that 0 Y X = μ - μ or Y X μ = μ .
Image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern