DA0-002 Data Analysis Practice Question
A financial analyst wants to compare the mean annual returns of three different investment strategies. Which statistical test is most appropriate?
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
One-way ANOVA
ANOVA is used to compare means of three or more groups.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
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Chi-square test
Why it's wrong here
Chi-square tests association between categorical variables, not differences among three continuous mean returns. It is tempting because it handles multiple groups, and would be correct if the analyst were testing whether strategy preference depends on investor type using count data.
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Paired t-test
Why it's wrong here
A paired t-test compares two measurements taken on the same subjects, so it cannot handle three independent strategy groups. It is tempting because it also tests means, and would be correct if the analyst compared each strategy's returns against another on matched years for the same portfolio.
- ✓
One-way ANOVA
Why this is correct
One-way ANOVA compares the means of three or more independent groups on a single continuous dependent variable, testing whether at least one strategy's mean annual return differs. It suits this scenario because the analyst has one factor with three levels.
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Two-sample t-test
Why it's wrong here
A two-sample t-test compares means between exactly two independent groups; three investment strategies require a one-way ANOVA. The t-test would be correct when comparing returns of two strategies only. Using it across three groups inflates Type I error.
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