Quality Control Chart refresher

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SkipE99

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Specific LOS was to be able to interpret or read (cant remember) a quality control chart. Remember that the benchmark return will be the flat horizontal line with the two bands on top and on bottom. Just because a manager posts returns consistently above the benchmark flat line, it does not mean that you can reject the Null. The Null would be that the Portfolio Manager does not add value. The null is he sucks. If his returns consistently outperform the benchmark, but fall WITHIN the bands, you cannot reject the null. You cannot say he does not suck.
The same goes the other way and I could totally see CFAI asking a question where the returns are consistently below the benchmark, but within the bands. If they are below the benchmark, but within the bands, you cannot reject the null and say he does not suck. You fail to reject the null that he sucks because his low returns are still within the range bands.
You can reject the null that he does not add value if the returns are consistently above the top range band.
 
I wouldn’t say the null is that he sucks, but that he is just completely average. I think quality control charts can be used to reject the null because he is either good enough or bad enough to be statistically different from the horizontal line. I’d have to re-read it though as it’s been a while
 
good point…edited closer to your correct and accurate suggestion. thanks
 
buuuuutttt…the LOS when I read it seemed to me to make sure the candidate knows how to interpret the chart so he knows whether or not the manager is worth keeping or not. i think a basic understanding of this chart and memorization of the Type 1 and Type 2 errors will help on a couple questions.
 
Just curious, does each managers have his own band(confidence interval) over time?
 
Sorry I have a question : what does it mean by Confidence Interval “WIDENS” in this context ?
 
alta168 Wrote:
——————————————————-
> Sorry I have a question : what does it mean by
> Confidence Interval “WIDENS” in this context ?
A wider confidence interval is decreasing the rejection range, like going from 90 to 95 percent confidence. This reduces your Type I error (false positives) but increases Type II error (failing to reject the null).
 
sbmarti2 Wrote:
——————————————————-
> I wouldn’t say the null is that he sucks, but that
> he is just completely average. I think quality
> control charts can be used to reject the null
> because he is either good enough or bad enough to
> be statistically different from the horizontal
> line. I’d have to re-read it though as it’s been
> a while
If the manager got bad result, and he will be out of the quality control chart too! (from the lower boundary.)
So we will reject the NULL, and does it mean we will fire the good manager??
 
H0 = Manager Adds No Value (he sucks)
HA = Manager Adds Positive Value (he’s good)
Type I Error: Rejecting H0 when it is actually true.
Layman’s terms: Investor may think that the manager adds value, when in fact, he sucks.
Type II Error: Failing to Reject H0 (AKA agreeing with H0) when it is actually false.
Layman’s terms: Investor may think that the manager sucks, when in fact, he provided good value.
 
bpdulog Wrote:
——————————————————-
> alta168 Wrote:
> ————————————————–
> —–
> > Sorry I have a question : what does it mean by
> > Confidence Interval “WIDENS” in this context ?
>
> A wider confidence interval is decreasing the
> rejection range, like going from 90 to 95 percent
> confidence. This reduces your Type I error (false
> positives) but increases Type II error (failing to
> reject the null).
A wider confidence interval is another way of saying a narrower significance level or in other words a narrower filter??? From 10 to 5% in a one tail test
 
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