CFA Level 1: Exam Question Answer - Null Hypothesis and Error Types

CFA Level 1 Exam Question Answer

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Question

Suppose we set the criterion for the rejection of the null that is extremely lax, assuring us that the null will not be rejected. Then, which of the following is/are true?

I. The probability of a Type I error is zero.

II. The probability of Type II error is zero.

III. The significance level of the test is 1.

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Explanations

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A. B. C. D. E.

E

A Type I error refers to the event that we will reject the null when, in fact, it is true. If the criterion is so loose that you never reject the null, then the probability of type I error is zero. A Type II error refers to the event that we will fail to reject the null when, in fact, it is false. If you never reject the null, then the probability of type II error is clearly non-zero. Finally, the significance level is the same as the probability of making a Type I error.