Suppose a stock qualifies as having moderate risk if the standard deviation of its monthly rate of return is less
than 10%. A stock rating agency randomly selects 36 months and decides the rate of return for a specific fund.
The standard deviation of the rate of return is computed to be 4.95%. Is there sufficient evidence to conclude
that the fund has moderate risk at the α=0.05 level of significance? A standard probability plot shows that the
monthly rates of return are typically distributed.
Test the claim using a hypothesis test.
What are the null and alternative hypotheses for the hypothesis test?
What is the conclusion based on the hypothesis test?

The claim is either the null hypothesis or the alternative hypothesis. The null hypothesis needs to contain an equality and the value mentioned in the claim. If the claim is the null hypothesis, then the alternative hypothesis states the opposite of each other. Thus;

Null Hypothesis; H₀: σ = 10

Alternative Hypothesis; H₁: σ < 10

Compute the value of the test statistic:

χ2 = [(n - 1)/(σ²)] * s²

χ2 = [(36 - 1)/(10²)] * 4.95²

χ2 = 8.576

The critical value of the left-tailed test is given in the row with df = n - 1 = 36 - 1 = 35 and in the column with 1 − α = 0.95 of the chi-square distribution table online, we have;

χ2_{1 - α} = 21.77

The rejection region then contains all values smaller than 21.77

If the test statistic is in the rejection region, then reject the null hypothesis:

8.576 < 13.848

Thus, we will reject H₀ and conclude that there is sufficient evidence to support the claim that the fund has moderate risk.

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