CFA Level 1: False Statements on Confidence Levels and Significance Tests

False Statements on Confidence Levels and Significance Tests

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Question

Which of the following statements regarding confidence levels and/or tests of significance is/are false? Choose the best answer.

Answers

A. In most hypothesis tests, the significance level is set equal to 0.10, 0.05, or 0.01.

B. All else equal, the probability of a Type I error decreases as the level of confidence increases.

C. The probability of a Type I error is denoted by the Greek letter alpha.

D. The confidence level of a hypothesis test can be found by subtracting the level of significance from the number one.

E. More than one of these answers is false.

F. The significance level of a test is equal to the power of a test.

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Explanations

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A. B. C. D. E. F.

Remember that the power of the test is equal to (1 - Type II error probability). This is because in most hypothesis tests, the level of significance, denoted by alpha, is set equal to the probability of a Type I error. Statisticians are primarily concerned with the probability of a Type I error, and rarely specify the probability of a

Type II error. Determining the probability of a Type II error, which is defined as the act of incorrectly failing to reject the null hypothesis, is inherently difficult to determine. The probability of a Type I error, however, can be determined with relative ease. A Type I error is defined as the act of incorrectly rejecting the null hypothesis. The remaining answers are all correct.

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