Hypothesis Testing

3. Are stock splits beneficial to stockholders? SNL Securities

studied stock splits in the banking industry over an

18-month period and found that stock splits tended to

increase the value of an individual’s stock holding. Assume

that of a sample of 20 recent stock splits, 14 led to an

increase in value, four led to a decrease in value, and two

resulted in no change. Suppose a sign test is to be used to

determine whether stock splits continue to be beneficial for

holders of bank stocks.

a. What are the null and alternative hypotheses?

b. With α = .05, what is the rejection rule?

c. What is your conclusion

16. The 1997 price/earnings ratios for a sample of 12 stocks are

shown in the following list ( Barron’s, December 8, 1997).

Assume that a financial analyst has provided the estimated

price/earnings ratio for 1998. Using a .05 level of

significance, what is your conclusion about the differences

between the price/earnings ratios for 1997 and 1998?

Stock 1997 P/E Ratios 1998 P/E Ratio (est)

Coke 40 32

Du Pont 24 22

Kodak 21 23

GE 30 23

GM 25 19

IBM 19 19

McD 20 17

Merck 29 19

Motorola 35 20

PM 17 18

WD 33 27

Xerox 20 16