1 Tail Test vs 2 Tail Test

CFA Level II Quant
#1

|Hypothesis 1:|The coefficient on GDP is negative.|
|Hypothesis 2:|The intercept term is equal to –4.|
|Hypothesis 3:|A 2.6% increase in the CPI will result in an increase in sales of more than 12.0%.|
|Hypothesis 4:|A 1% increase in industrial production will result in a 1% decrease in sales.|

Can someone explain why Hypotheses 1 is a one tailed test? i thought it would be = or =/ to negative so that would be a two tailed test?

#2

A two-tailed test distinguishes three possibilities; think of it as the Goldilocks test:

  • The value is too big
  • The value is too small
  • The value is just right

A one-tailed test distinguishes only two possibilities.

How many possibilities are there for Hypothesis 1?

#3

Only two since positive and negative so it’s a 1 tailed test, that explanation helped a lot! Thanks!

#4

Well . . . nonnegative (can’t forget about zero) and negative. But you definitely have the idea.

Good to hear.

My pleasure.