1. A new trader has joined your firm and has been trading his own strategy, which he believes to be more predictable than the standard strategy employed by your firm. You suspect that his strategy is more unpredictable (measured as the standard deviation of the returns) than the standard strategy. You calculate the sample standard deviation of the standard strategy returns to be $3.5 in the last 50 days and the sample standard deviation of the new strategy to be $3.8 in the last 40 days.

a)State the null and alternative Hypotheses.

b)Test the hypothesis that the new strategy is more unpredictable than the standard strategy at a 5% level of significance assuming that the strategies are independent and normally distributed.

c)Make a decision based on the results of the test.