FRM Part I · FRM Exam Part I · Hypothesis Testing
A risk analyst estimates the mean monthly return of a fund from 64 independent observations. The sample standard deviation is 4.0%, and the sample mean is 1.2%. What is the standard error of the sample mean?
The standard error of the mean is the sample standard deviation divided by the square root of the sample size. Here 4.0% divided by 8 equals 0.50%. Dividing by 64 instead of its square root would understate the standard error.
- A0.50%Correct
- B0.0625%
- C4.00%
- D0.25%
Explanation
Standard error = s/sqrt(n) = 4.0%/sqrt(64) = 4.0%/8 = 0.50%. Using s/n gives 0.0625%, which wrongly divides by n instead of its square root. Using 4.0% ignores the sample size entirely.
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