Hypothesis Test Alpha Level and Area of Rejection | CFA Level 1 Exam Prep

Alpha Level and Area of Rejection in Hypothesis Testing

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Question

If alpha equals 0.05 for a two-tailed hypothesis test, how large is the area of rejection in the upper or right tail?

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Explanations

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A. B. C. D. E.

B

If it is a two tailed test, then there is a similar size region in each tail. So 0.05/2 = 0.025.

In hypothesis testing, the alpha level (α) represents the significance level or the probability of rejecting the null hypothesis when it is actually true. It is typically set before conducting the test and helps determine the critical region or the area of rejection.

For a two-tailed hypothesis test, the null hypothesis states that there is no significant difference between the sample mean (or proportion) and the population mean (or proportion), while the alternative hypothesis suggests that there is a significant difference. The two-tailed test is used when we are interested in detecting differences in both directions (e.g., whether the sample mean is significantly different from the population mean, whether it is significantly larger, or whether it is significantly smaller).

To determine the area of rejection in the upper or right tail, we need to divide the alpha level equally between the two tails of the distribution. Since this is a two-tailed test, we have two tails representing the upper and lower extremes.

Given that the alpha level is 0.05, we want to split this equally between the upper and lower tails. To find the area of rejection in the upper tail, we divide 0.05 by 2:

0.05 / 2 = 0.025

Therefore, the area of rejection in the upper or right tail is 0.025.

The correct answer is B. 0.025.