Hypothesis Testing

In the banking industry, the return on equity ratio or percentage is used to evaluate the financial performance of a bank. Such information is extremely valuable to investors.

Calculate the return on equity (ROE) for a sample of 20 banks for the year before the Sarbanes-Oxley Act was enacted. For the same sample of banks, calculate the ROE for the year following the enactment of the Sarbanes-Oxley Act.

Later, answer the following questions:

• After the enactment of the Sarbanes-Oxley Act, was the average bank’s ROE lower than it was before the act? If so, why do you think that was the case?
• What is the null hypothesis for this hypothesis test?
• What is the alternative hypothesis for this hypothesis test?
• Choose at least three different significant levels to conduct the hypothesis test. Is it possible that a Type I error occurred with the hypothesis test? Why or why not?
• Is it possible that a Type II error occurred? Why or why not?

Submit your answers in an eight- to ten-page Word document.