Hypothesis Testing Procedure: Five Steps Explained | CFA Level 1 Exam

Not one of the five steps in the hypothesis testing procedure

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Question

Which of the following is not one of the five steps in the hypothesis testing procedure?

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Explanations

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A. B. C. D. E.

C

The beta is determined by our choice of the decision rule and significance level. It is not determine on the outset.

The five steps in the hypothesis testing procedure are as follows:

  1. State the null and alternative hypotheses: The first step in hypothesis testing is to clearly define the null hypothesis (H0) and the alternative hypothesis (Ha). The null hypothesis represents the assumption being tested, while the alternative hypothesis represents the opposite or alternative claim.

  2. Select a level of significance (alpha): The level of significance, denoted as alpha (α), determines the probability of rejecting the null hypothesis when it is true. It represents the maximum allowable probability of making a Type I error, which is the rejection of a true null hypothesis.

  3. Identify the test statistic: The test statistic is a numerical value computed from the sample data that is used to assess the likelihood of observing the results under the null hypothesis. The choice of test statistic depends on the nature of the hypothesis being tested and the characteristics of the data.

  4. Formulate a decision rule: The decision rule specifies the criteria for accepting or rejecting the null hypothesis based on the calculated test statistic. It involves comparing the test statistic to critical values or p-values derived from the chosen statistical test.

  5. Make a decision and draw conclusions: After calculating the test statistic and applying the decision rule, a decision is made regarding whether to accept or reject the null hypothesis. This decision is based on the observed data and the predetermined level of significance. Conclusions are then drawn based on the decision made.

Now, considering the given options:

A. Identify the test statistic: This step is an integral part of the hypothesis testing procedure, as it involves selecting and calculating the appropriate test statistic for the hypothesis being tested.

B. All of these answers are part of the five steps: This answer suggests that all the options mentioned (including option C) are part of the five steps, which is incorrect since one of the options must be not part of the five steps.

C. Select a level for beta: This option is not part of the five steps in the hypothesis testing procedure. The level of significance, denoted as alpha (α), is selected to determine the probability of making a Type I error. Beta (β) represents the probability of making a Type II error and is not directly part of the hypothesis testing procedure.

D. State the null and alternative hypothesis: This step is one of the core steps in hypothesis testing, where the null and alternative hypotheses are clearly defined.

E. Formulate a decision rule: This step involves establishing a decision rule based on the chosen test statistic and the level of significance to determine whether to accept or reject the null hypothesis.

Therefore, the answer to the question "Which of the following is not one of the five steps in the hypothesis testing procedure?" is option C. Select a level for beta.