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CFA Level I · CFA Level I Exam · Estimation and Hypothesis Testing

A researcher ranks 12 fund managers by past-year return and by Sharpe ratio and wants to test whether the two rankings are related, without assuming the variables are jointly normal. The most appropriate test is the:

The Spearman rank correlation test is most appropriate. It works on the ranks of the two variables, so it does not require joint normality and directly tests whether the rankings are related. The F-test and chi-square variance test are parametric, assume normality, and address variances rather than association.

  1. ASpearman rank correlation testCorrect
  2. BF-test for equality of variances
  3. CChi-square test of a single variance

Explanation

The Spearman rank correlation uses ranks, so it needs no normality assumption and tests association between two ordered variables. The F-test and chi-square test of variance are parametric and assume normal populations, and neither tests association between rankings.

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