that both the risk-free rate and the volatility are known and constant.

…the more significant the result.

Problem | Effect | Solution |
---|---|---|

Heteroskedasticity | Incorrect standard errors | Use robust standard errors (corrected for conditional heteroskedasticity) |

Serial Correlation | Incorrect standard errors (additional problems if a lagged value of the dependent variable is used as an independent variable) | Use robust standard errors (corrected for serial correlation) |

Multicollinearity | High R^2 and low t-statistic | Remove one or more independent variables may help. |

t = (sample mean – population mean) / s/√n

s = sample standard deviation

n = sample size

- Determine the level of significance which is 100% minus the confidence level.
- Determine if it is a one-tail or a two-tail test.
*Confidence Intervals are always two-tailed.* - Determine degrees of freedom which is usually one less than the sample size.
- Look up the critical t-value
- A
**Standard Confidence Interval**is: sample mean +/- t-critical * standard deviation

**Confidence Interval Around the Mean** requires the use of standard error instead of standard deviation, standard error is calculated as follows:

standard error = standard deviation / √n

**TRUE**

It can be diversified away.