Question

Socially conscious investors screen out stocks of alcohol and tobacco makers, firms with poor environmental records, and companies with poor labor practices. Some examples of "good," socially conscious companies are Johnson and Johnson, Dell Computers, Bank of America, and Home Depot. The question is, are such stocks overpriced? One measure of value is the P/E, or price-to-earnings ratio. High P/E ratios may indicate a stock is overpriced. For the S&P Stock Index of all major stocks, the mean P/E ratio is μ = 19.4. A random sample of 36 "socially conscious" stocks gave a P/E ratio sample mean of x = 17.7, with sample standard deviation s = 5.2. Does this indicate that the mean P/E ratio of all socially conscious stocks is different (either way) from the mean P/E ratio of the S&P Stock Index? Use α = 0.05.

(a) What is the level of significance?

Answer 1

a)

level of significance =0.05

from above test statistic = -1.962

we fail to reject the null

we do not have sufficient evidence to conclude that mean P/E ratio of all socially conscious stocks is different from the mean P/E ratio of the S&P Stock Index