ASSIGNMENT 3

Andrew Reeves Tracy Favish Clayton Redford Bradley Tighy 304092 481059 389261 376372 (Finance) (Finance) (Finance) (Finance)

28 February 2013

8.a) H0: 1=2 H1: 1=2

8.b)

t Test The TTEST Procedure Difference: Before - After N Mean Std Dev Std Err Minimum Maximum 12-2.0000 3.2474 0.9374 -6.0000 4.0000 Mean 95% CL Mean Std Dev 95% CL Std Dev -2.0000 -4.0633 0.0633 3.2474 2.3004 5.5136 DF t Value Pr > |t| 11 -2.13 0.0562 The null hypothesis would be rejected at a significance level of 0.0563.
8.c)

t Test The TTEST Procedure Variable: Score Group After Before Diff (1-2) N 12 12 Mean Std Dev Std Err Minimum 6.0833 3.4761 1.0035 1.0000 4.0833 1.6765 0.4840 1.0000 2.0000 2.7289 1.1141 Maximum 10.0000 6.0000

Group Method Mean 95% CL Mean Std Dev 95% CL Std Dev After 6.0833 3.8747 8.2919 3.4761 2.4625 5.9020 Before 4.0833 3.0181 5.1485 1.6765 1.1876 2.8465 Diff (1-2)Pooled 2.0000 -0.3104 4.3104 2.7289 2.1105 3.8624 Diff (1-2)Satterthwaite2.0000 -0.3635 4.3635 Method Variances DF t Value Pr > |t| Pooled Equal 22 1.80 0.0864 SatterthwaiteUnequal 15.855 1.80 0.0917 Equality of Variances Method Num DF Den DF F Value Pr > F Folded F 11 11 4.300.0230 The F-test for the equality of variances above shows us that the variances are assumed not to be equal as 0.0230 is less our level of significance 0.05, therefore, we reject that the variances are equal and thus we use the Satterthwaite test and we therefore will reject the null hypothesis at 0.0918.

8.d) There is a difference in our conclusions. The level of significance required in the first test (Paired Test), 0.056, which is much smaller than the level of significance required in the second test (two-sample test), 0.0917. In the pair test we have two observations per person. Therefore, each person acts as his or her own control and the conponent of variablity from differences in people has been eliminated. 9. A one-sample t-test would be used to measure the variability and distribution in one firms shares over a given period of time. The one-sample t-test should be used as only one companys returns are of interest and this is the preferred test. A two-sample t-test would be used to measure two different groups of stock prices.(Their variability and distribution), for example the stocks of two different companies over a given period of time. The two-sample t-test should be used as two independent companies stocks are being observed over a period of time. A paired t-test could measure the difference between the stock and the benchmark portfolio over a given period of time. This test is best as the results are dependent on each other. 10a. In order to determine the required sample size we need to evaluate the different parameters separately. The larger the sample size, the smaller the differences (D) we can detect with our tests. However there are various practical and financial constraints involved in obtaining larger sample sizes, which also need to be considered. The population standard deviation is the most difficult parameter to specify unless previous studies have been done. Even then, adjustments may have to be made to the given standard deviation as they refer to a slightly different population or sample. Two solutions are: either to use estimated standard deviation and measure the effects of both sample size and differences, or alternatively to do a pilot survey. However this can be expensive and lead to biases in sample standard deviation. To determine at what level of significance you would like to test, you would need to decide what risk you are willing to take of being wrong when detecting a difference. A final consideration would be the power of the test as measured by the ability of the model not to commit a Type II error. As such, the sample size must be large enough not to commit a Type I error as well as a Type II error. b. The significance level, alpha, must be small. This represents the risk you are prepared to take of being wrong. (1-beta) must be large as it represents the power of the test. Taking these values into consideration n must be significantly large as to detect the size of the difference which you want to measure. The difference must be as small as possible and the power as large as possible for a significant result. C and D Summary Statistics Results The MEANS Procedure Analysis Variable : After Mean Std Dev Minimum Maximum N 6.08333333.4761089 1.000000010.000000012

For this one-sample test we use the after data. Holding all variables constant, we find the required sample sizes by changing values of powers, alphas, standard deviations and differences.

onesamplemeans test=t nullmean=0 mean=6.083 stddev=3.476 ntotal=. power= 0.95;

The POWER Procedure One-sample t Test for Mean Fixed Scenario Elements Distribution Normal Method Exact Null Mean 0 Mean 6.083 Standard Deviation 3.476 Nominal Power 0.95 Number of Sides 2 Alpha 0.05 Computed N Total Actual Power N Total 0.968 7

onesamplemeans test=t nullmean=0 mean=6.083

stddev=3.476 ntotal=. power= 0.90; The POWER Procedure One-sample t Test for Mean Fixed Scenario Elements Distribution Normal Method Exact Null Mean 0 Mean 6.083 Standard Deviation 3.476 Nominal Power 0.9 Number of Sides 2 Alpha 0.05 Computed N Total Actual Power N Total 0.923 6

proc power; onesamplemeans test=t mean=6.083 stddev=3.476 ntotal=. power= 0.95 alpha=0.01;

The POWER Procedure One-sample t Test for Mean Fixed Scenario Elements Distribution Normal Method Exact Alpha 0.01 Mean 6.083 Standard Deviation 3.476 Nominal Power 0.95 Number of Sides 2

Null Mean Computed N Total Actual Power N Total 0.969 10 proc power; onesamplemeans test=t mean=6.083 stddev=3.476 ntotal=. power= 0.95 alpha=0.1;

The POWER Procedure One-sample t Test for Mean Fixed Scenario Elements Distribution Normal Method Exact Alpha 0.1 Mean 6.083 Standard Deviation 3.476 Nominal Power 0.95 Number of Sides 2 Null Mean 0 Computed N Total Actual Power N Total 0.977 6 proc power; onesamplemeans test=t nullmean=0 mean=6.083 stddev=2.5 ntotal=. power= 0.95;

The POWER Procedure One-sample t Test for Mean Fixed Scenario Elements Distribution Normal Method Exact Null Mean 0

Mean 6.083 Standard Deviation 2.5 Nominal Power 0.95 Number of Sides 2 Alpha 0.05 Computed N Total Actual Power N Total 0.977 5 proc power; onesamplemeans test=t nullmean=0 mean=5 stddev=3.476 ntotal=. power= 0.95;

Fixed Scenario Elements Distribution Normal Method Exact Null Mean 0 Mean 5 Standard Deviation 3.476 Nominal Power 0.95 Number of Sides 2 Alpha 0.05

The POWER Procedure One-sample t Test for Mean Computed N Total Actual Power N Total 0.964 9

As we decreased our level of significance, our required sample size has increased. From the equation, as alpha decreases the z-value increases, causing n to increase proportionally. As we decrease our power, our required sample size has decreased as the z-value decreases, causing n to decrease. As we decrease our standard deviation our required sample size decreases. As we decrease our differences our required sample size increases. When adjusting our variable under consideration we keep all other variables constant to fully assess the impact of a change in a particular variable.

Question 11

a)

H0: 1=2 H1: 1=2

b) Holding all parameters constant and adjusting the variables under consideration to see the effect on n.

twosamplemeans test=diff meandiff=2 stddev=2.7 ntotal=. power= 0.95;

The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 2 Standard Deviation 2.7 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Alpha 0.05 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.953 98

proc power; twosamplemeans test=diff meandiff=2 stddev=2.7 ntotal=. power= 0.90;

The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 2 Standard Deviation 2.7 Nominal Power 0.9 Number of Sides 2 Null Difference 0 Alpha 0.05 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.905 80

proc power; twosamplemeans test=diff meandiff=2 stddev=2.7 ntotal=. power= 0.95 alpha=0.1; The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Alpha 0.1 Mean Difference 2 Standard Deviation 2.7 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.954 82 proc power;

twosamplemeans test=diff meandiff=2 stddev=2.7 ntotal=. power= 0.95 alpha=0.01; The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Alpha 0.01 Mean Difference 2 Standard Deviation 2.7 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.951 134

proc power; twosamplemeans test=diff meandiff=2 stddev=1.4 ntotal=. power= 0.95; The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 2 Standard Deviation 1.4 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Alpha 0.05 Group 1 Weight 1 Group 2 Weight 1 Computed N Total

Actual Power N Total 0.953 28 proc power; twosamplemeans test=diff meandiff=2 stddev=4.5 ntotal=. power= 0.95; The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 2 Standard Deviation 4.5 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Alpha 0.05 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.951 266 proc power; twosamplemeans test=diff meandiff=5 stddev=2.7 ntotal=. power= 0.95; The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 5 Standard Deviation 2.7 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Alpha 0.05

Group 1 Weight Group 2 Weight Computed N Total Actual Power N Total 0.958 18 proc power; twosamplemeans test=diff meandiff=1 stddev=2.7 ntotal=. power= 0.95;

1 1

The POWER Procedure Two-Sample t Test for Mean Difference Fixed Scenario Elements Distribution Normal Method Exact Mean Difference 1 Standard Deviation 2.7 Nominal Power 0.95 Number of Sides 2 Null Difference 0 Alpha 0.05 Group 1 Weight 1 Group 2 Weight 1 Computed N Total Actual Power N Total 0.951 382 With a much lower standard deviation a smaller sample size is required to detect the same difference with the same level of significance. When changing the mean, to detect a much larger difference with the same standard deviation and level of significance a much smaller sample size is required. When we decrease the alpha we require a larger sample size. When we decrease the power we require a smaller sample size. C) When looking for a small significant difference one should design a study with a very low alpha and a very high power. A large sample size would also be a requirement. The sample standard deviation should also be as low as possible as standard deviation is directly proportional to the required sample size.

The relationships can be seen in the equation:

12. Firstly, one should replace the t value with a z value in order to infer a ball-park figure as the z table is much simpler to use. Once the sample size is obtained as such, it is used in calculating a t value for the upper bound of the sample size. The process is repeated using resultant n values, until both sides of the equation are equal. If the resultant sample size is smaller than the number of subjects available, then the test is worth doing. If the required sample size is larger than the number of available subjects, then the parameters can be adjusted. The significance level can be decreased, or the smallest difference worth detecting can be increased. One can also be more selective in ones data procurement.

13. The paired t-test is the same as the one sample t-test for differences. n represents required sample size and is rounded up to the closest integer. tv,p represents a Student t quantile with v degrees of freedom and probability p. Alpha represents the significance level of the test. Beta represents 1-power. D represents delta, or standard deviation. As delta increases, required sample size decreases.