False Statements about Hypothesis Testing in CFA® Level 1 Exam

False Statements about Hypothesis Testing

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Question

Which of the is/are false?

I. A high p-value is necessary to reject a null hypothesis.

II The higher the significance level, the greater is the chance that the null will be rejected when it is false.

III. The higher the probability of Type II error, the higher is the chance of rejecting the null when it is false.

Answers

Explanations

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

Explanation

You can think of the p-value as the maximum probability that the null hypothesis is true despite observing the value of the test statistic that you have in the sample at hand. Thus, the lower the p- value, the greater is your confidence in rejecting the null hypothesis. The significance level represents an upper bound on the probability that the null hypothesis is true given the observed sample and the testing procedure. Hence, if you reject the null at the 5% significance level, for e.g., then the probability that the null is true despite your statistical evidence to the contrary could be as high as 5% (but no more, under the assumptions of the test). A

Type II error refers to the event that we will fail to reject the null when it is false. The higher the probability of a Type II error, the lower the chance of rejecting the null when it is false.

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