Type 1 and 2 error

CFA Level III Portfolio Management
#1

CFA 2010 L3 Mock exam

Dear all,

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Q 23 – 30 Performance attribution

Given:

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.”

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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

#2

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

What’s the null hypothesis?

#3

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.

#4

Bilal,

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

#5

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.