David Black wants to test whether the estimated beta in a market model is equal to one. He collected a sample of 60 monthly returns on a stock and estimated the regression of the stock’s returns against those of the market. The estimated beta was 1.1, and the standard error of the coefficient is equal to 0.4. What should Black conclude regarding the beta if he uses a 5% level of significance? The null hypothesis that beta is:
A.equal to one is rejected.
B.equal to one cannot be rejected.
C.equal to one cannot be rejected or accepted.
D.not equal to one cannot be rejected.
Answer:B
The calculated t-statistic is t = (1.1 ? 1.0) / 0.4 = 0.25. The critical t-value for (60 ? 2) = 58 degrees of freedom is approximately 2.0. Therefore, the null hypothesis that beta is equal to one cannot be rejected.