A portfolio manager was analyzing the price-earnings ratio for this year’s performance. His boss said thatthe average price-earnings ratio was 20 for the many stocks that his firm had traded, but the portfoliomanager felt that the figure was too high.

A portfolio manager was analyzing the price-earnings ratio for this year’s performance. His boss said thatthe average price-earnings ratio was 20 for the many stocks that his firm had traded, but the portfoliomanager felt that the figure was too high.

A portfolio manager was analyzing the price-earnings ratio for this year’s performance. His boss said thatthe average price-earnings ratio was 20 for the many stocks that his firm had traded, but the portfoliomanager felt that the figure was too high. He randomly selected a sample of 50 price-earnings ratios and
found a mean of 18.17 and a standard deviation of 4.60. Assume that the population is normally
distributed, and test at the 0.01 level of significance. Which of the following is the correct decision rule forthe manager to use in this situation?

A. Because 2.81 is greater than 2.33, reject H0. At the 0.01 level, the sample data suggest that the average price-earnings ratiofor the stocks is less than 20.
B. If t > 2.68 or if t
C. Because –2.81 falls in the rejection region, reject H0. At the 0.01 level, the sample data suggest that the average priceearningsratio for the stocks is less than 20.
D. If z > 2.33, reject H0.


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