Sorry, I have a question about the Z test. Why did you find the critical value depends on the standard deviation of 0.025 instead of 0.05? Is it about one tailed test and two tailed test? Thank you!
When the Alternate Hypothesis is "not equal to" the population mean, then we use a two tailed distribution. In a z or t test for a two tailed distribution, we find the z score or a t score for "alpha/2" because the critical value lies on each side of the mean. So if the Confidence Level is 0.95, then the Level of Significance is 0.05. Then alpha/2 = 0.05/2 = 0.025. If the Alternate Hypothesis is a "less then" population mean kinda scenario, we use a left tailed distribution. Then the level of significance is not divided by 2. So it just remains alpha. And we calculate the z and t test for alpha. Hope this helps...
q: if you saw the sample proportion is larger than the population proportion, why do we do the two-tail test? The reason we want to do a test is to see if what we have observed (in this case, the sample proportion is larger than the population proportion) is statistically significant or within the variance of the data. So, I think it should be a right-tail test, what do you think?
You are one of the best statistics educator on YT. Express concepts concisely with clarity, go step by step and one does not feel stressed listening to u. Thank u
Hi! There are two points I'd like to address... 1. I noticed that the problem said "continuous compounding" so the discounting should be "e^(-0.08*2)". 2. The problem also said that the risk free rate is "per annum" which means annually. This would in make the discounting factor "e^(-0.08)". -> this would also change the probability equation, substituting "1.08" with "e^(0.08) Making the following corrections, I have the price of the call option = 9.61 I'm currently reviewing information for actuarial exam FAM which I'm taking on 3/5/2024!
Hi, thank you for your comment. You're absolutely right. I simplified the binomial tree equations however I forgot to change the title of the question. I simplified it by using simple interest rate, not with continuous compounding. However, if it were, you're observations are correct. I hope that helps and good luck with your exam!
2 questions. 1. Why did the formula for 2 step change when calculating european options. In prev videos it was pfu + (1-p)fd/1+rf. Now you have introduced the eurler's number which I can't really see where you discussed why. 2. How would you then use the two step to calculate american options?
we are assuming a continuously compounding interest rate, the real question is why did he count the 1.4147 $, if the investor decided to use the American option earlier then the value of the option should be 0 at t=1 not 1.4147 no ?
