Manager Continuation Decision 2010, quality, management, control, likely

RoastBeef

Question 1:

type I and II error
Posted by: happyking02 (IP Logged)
Date: May 16, 2010 11:55PM

Suppose that all of a firm’s managers are outperforming the benchmark, some by a little, some by a lot. If the confidence intervals for a quality control charts in portfolio management were widened, what would the most likely effect be?

A) Type I error would become more likely and Type II error would become more likely.

B) Type I error would become less likely and Type II error would become more likely.

C) Type I error would become more likely and Type II error would become less likely.

Can u please explain? thanks!

Question 2:

type I or II
Posted by: cfasf1 (IP Logged)
Date: May 5, 2009 12:09AM

Suppose that a portfolio management firm has decided that the costs of hiring and firing managers are excessive. Which of the following would be their most appropriate course of action? The firm should:
A) tolerate more Type I error to reduce Type II error.
B) reduce both Type I and Type II errors.
C) tolerate more Type II error to reduce Type I error.



Edited 1 time(s). Last edit at Sunday, April 17, 2011 at 01:45AM by deriv108.

zwjy

B and C

You are not rejecting those people who are actually not performing well. Type 2 error.

mar350

B and B

NO EXCUSES

bodhisattva

B - If the band gets wider, it's harder to reject null so Type 2 error is more likely

A - A firm would want to tolerate some managers that provide zero (value) Type 1 error but avoid firing managers that provide positive value (Type 2 error)

jmh530

AFers let us agree on one thing straight off the bat,
1A
2B
can be thrown out immediately. a reduction in one error type leads to an increase in the other ........................great so now we at 50% ............................a type 1 error is what happens at most firms, firms err on the side of caution and keep the bad with the good rather than losing a good manager (hiring costs and beauracracy also plays a part).................a type 2 error is when u fire anyone and everyone that shows any signs of weakness ( happened at enron i heard) so u risk throwing out good managers but get rid of most if not all bad managers.......................



so my final answer is B and A


Thanks again for posting this

strikethree

deriv108,

Are B and A the correct answers ?

Windjam

Yes. They can be found in AF.

IAmNeil

relax appraisal criteria = reduce the standards = widen confidence interval.

so more chance of Type I errors...(more false positives).

CP

skycfa

Another point to memorize:

The manager could be fired if his portfolio's returns are inside [or below] of the Quality Control Chart.

Can anyone tell why the QC chart is narrowing over time? I don't understand Schweser's explanation.

bkballa

> Can anyone tell why the QC chart is narrowing over
> time? I don't understand Schweser's explanation.

Essentially mean-reversion. For a manager to show significant alpha, year after year, and never underperform (such as Madoff reported to have done) is statistically aberrant and should draw the attention of the SEC.