An investor wants to compare the risks associated with two different stocks. One

Question

An investor wants to compare the risks associated with two different stocks. One way to measure the risk of a given stock is to measure the variation in the stock’s daily price changes.

In an effort to test the claim that the variance in the daily stock price changes for stock 1 is different from the variance in the daily stock price changes for stock 2, the investor obtains a random sample of 21 daily price changes for stock 1 and 21 daily price changes for stock 2.

The summary statistics associated with these samples are: n1 = 21, s1 = .849, n2 = 21, s2 = .529.  

If you follow Bluman's advice and place the larger variance in the numerator, what is the test value associated with this test of hypothesis? Place your answer, rounded to 3 decimal places, in the blank. For example, 3.456 would be a legitimate entry.

Explanation / Answer

Formulla for F test

F=s1^2/s2^2

lthe larger of the two variances is placed in the numerator.

F=0.849^2/0.529^2

=(0.849/0.529)^2

=-2.644973

=-2.645(rounded to 3 decimals)

ANSWER:-2.645

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