Hypothesis Testing in Statistical Analysis | CFA Level 1 Exam Answer

Hypothesis Testing

Prev Question Next Question

Question

Melinda May, a quantitative analyst with Smith, Kleen, & Beetchnutty Brokerage, has been instructed to perform a statistical analysis to test whether the earnings of biotechnology companies are negatively related to the growth of generic drug consumption. Ms. May begins her analysis by formulating and stating a hypothesis. Next, Melinda proceeds with an identification of the appropriate test statistic and its probability distribution. Now that the first two steps in the hypothesis testing process have been completed, Ms. May should proceed with which of the following? Choose the best answer.

Answers

Explanations

Click on the arrows to vote for the correct answer

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

C

Hypothesis testing involves a series of seven explicit steps:

Step 1: Formulating and stating the hypothesis

Step 2: Identifying the appropriate test statistic and its probability distribution

Step 3: Specifying the significance level

Step 4: Stating the decision rule

Step 5: Collecting the data and performing the necessary calculations

Step 6: Making the statistical decision

Step 7: Making the economic/investment decision.

In this example, Melinda May, a quantitative analyst, has begun her analysis by completing the first two steps in the hypothesis testing process. Now that the hypothesis has been stated and the appropriate test statistic has been calculated, Ms. May should proceed with a determination of the significance level, which is denoted by the Greek letter alpha. Remember that the significance level is equal to the probability of a Type I error, which is defined as incorrectly rejecting the null hypothesis. Subtracting the significance level from the number one will yield the confidence interval.

Prev Question Next Question