that both the risk-free rate and the volatility are known and constant.
|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
It can be diversified away.