Question 1: type I and II error Posted by: happyking02 (IP Logged) Date: May 16, 2010 11:55PM Suppose that all of a firm’s managers are outperforming the benchmark, some by a little, some by a lot. If the confidence intervals for a quality control charts in portfolio management were widened, what would the most likely effect be? A) Type I error would become more likely and Type II error would become more likely. B) Type I error would become less likely and Type II error would become more likely. C) Type I error would become more likely and Type II error would become less likely. Can u please explain? thanks! Question 2: type I or II Posted by: cfasf1 (IP Logged) Date: May 5, 2009 12:09AM Suppose that a portfolio management firm has decided that the costs of hiring and firing managers are excessive. Which of the following would be their most appropriate course of action? The firm should: A) tolerate more Type I error to reduce Type II error. B) reduce both Type I and Type II errors. C) tolerate more Type II error to reduce Type I error.

B and C You are not rejecting those people who are actually not performing well. Type 2 error.

B and A

B and B

B - If the band gets wider, it’s harder to reject null so Type 2 error is more likely A - A firm would want to tolerate some managers that provide zero (value) Type 1 error but avoid firing managers that provide positive value (Type 2 error)

AFers let us agree on one thing straight off the bat, 1A 2B can be thrown out immediately. a reduction in one error type leads to an increase in the other …great so now we at 50% …a type 1 error is what happens at most firms, firms err on the side of caution and keep the bad with the good rather than losing a good manager (hiring costs and beauracracy also plays a part)…a type 2 error is when u fire anyone and everyone that shows any signs of weakness ( happened at enron i heard) so u risk throwing out good managers but get rid of most if not all bad managers… so my final answer is B and A Thanks again for posting this

deriv108, Are B and A the correct answers ?

Yes. They can be found in AF.

b and a

Sorry, I am confused. Refering to Question 1 mentioned above & Exhibit 5 on P.176 of CFAI text,Vol6 : What is meant by “the confidence intervals for a quality control charts were widened” here ? Does it mean : the confidence interval is increased (e.g., from 80% to 90%) ? And in this case, will the funnel-shaped lines (upper/lower envelopes) of quality control charts be more far away from X-axis (horizontal line) ? I saw in one question of last year’s mock exam (as below), they said “relax the appraisal criteria”. Does this also mean that the confidence intervals for a quality control charts were widened" ? or narrowed (e.g., from 90% to 80%) ? Clark asks Landcaster about the strict appraisal criteria used to evaluate the different managers employed by the Fund. Landcaster said, "The Fund is willing to risk firing good managers, a Type II error, in order to prevent retaining poor managers, a Type I error, But I would prefer if the Fund would “relax the appraisal criteria”. If the Fund adopted Landcaster’s preferred appraisal criteria, the most likely impact would be an increase in : A. Type I error only B. Type II error only C. Both types of error

relax appraisal criteria = reduce the standards = widen confidence interval. so more chance of Type I errors…(more false positives).

cpk123 Wrote: ------------------------------------------------------- > relax appraisal criteria = reduce the standards = > widen confidence interval. > > so more chance of Type I errors…(more false > positives). And, What does “widen confidence interval” mean ? e.g., from 90% to 80% ?

B and A. This is how I remember the difference. Null hypothesis -> Null = NOthing… managers add NO value. Type I, he’s done (One and Done) -> He’s done but you keep him around. Type II -> Too (2) Bad you fired a good manager.

Another point to memorize: The manager could be fired if his portfolio’s returns are inside [or below] of the Quality Control Chart. Can anyone tell why the QC chart is narrowing over time? I don’t understand Schweser’s explanation.

> Can anyone tell why the QC chart is narrowing over > time? I don’t understand Schweser’s explanation. Essentially mean-reversion. For a manager to show significant alpha, year after year, and never underperform (such as Madoff reported to have done) is statistically aberrant and should draw the attention of the SEC.

thanks, that helps.

alta168 Wrote: ------------------------------------------------------- > Sorry, I am confused. Refering to Question 1 > mentioned above & Exhibit 5 on P.176 of CFAI > text,Vol6 : > > What is meant by “the confidence intervals for a > quality control charts were widened” here ? Does > it mean : the confidence interval is increased > (e.g., from 80% to 90%) ? And in this case, will > the funnel-shaped lines (upper/lower envelopes) of > quality control charts be more far away from > X-axis (horizontal line) ? I think “the confidence intervals for a quality control charts were widened” shall mean that the confidence intervals : e.g., changed from 90% to 80%, and the funnel-shaped lines of quality control charts be more far away from X-axis (horizontal line). Anyone else can confirm ?

> I think “the confidence intervals for a quality > control charts were widened” shall mean that the > confidence intervals : e.g., changed from 90% to > 80%, and the funnel-shaped lines of quality > control charts be more far away from X-axis > (horizontal line). > > Anyone else can confirm ? Sounds good to me.

agreed.