Type 1 and 2 error

CFA 2010 L3 Mock exam

Dear all,

Q 23 – 30 Performance attribution


Clark also says…”The fund is willing to risk firing good manager, a type II error, in order to prevent retaining poor manager, as Type I error. But I would prefer if the fund would relax the appraisal criteria.”

Does “…would relax the appraisal criteria.” Mean ignore the mistakes arising from Type I and II error and continue to live with the outcome.

If my understanding is correct, then the fund would be left Type 1 error (retaining non performing managers and continue to fire performing managers)

Kindly confirm

You cannot determine which type of error you’re making without first determining your null hypothesis.

What’s the null hypothesis?

Null = VA added = 0

Type 1= I reject Null (although it is true) and I keep the manager who is not generating value added.

Type 2 error = I fail to reject Nul (although its not true) l and I suspend a manager who is generating value added.

Remember they are errors … You do what you should NOT have done.

Type 2 is worse than Type 1.

Type 1 error cannot be doing both retaining and firing … its firing good performing managers.


thank you for sharing.

Please let me know if the below is written anywhere in schweser set of books or is it you arrived from somewhere else.

Type 2 is worse than Type 1.

Thank you

I remember reading this but I’m not quite sure if it was a past mock or cfa books (cfai exercises EOC). Not sure to be honest.