msk2222's version from 2018-02-18 23:38

## HYPOTHESIS TESTING

Hypothesis testingWith reference to statistical inference, the subdivision dealing with the testing of hypotheses about one or more populations.
Steps in Hypothesis TestingStating the hypotheses. Identifying the appropriate test statistic and its probability distribution.Specifying the significance level.Stating the decision rule.Collecting the data and calculating the test statistic.Making the statistical decision.Making the economic or investment decision.
Definition of Null HypothesisThe null hypothesis is the hypothesis to be tested. For example, we could hypothesize that the population mean risk premium for Canadian equities is less than or equal to zero.
Definition of Alternative Hypothesishypothesis accepted when the null hypothesis is rejected. Our alternative hypothesis is that the population mean risk premium for Canadian equities is greater than zero.
two-sided hypothesis test (or two-tailed hypothesis test)We reject the null in favor of the alternative if the evidence indicates that the population parameter is either smaller or larger than θ0
one-sided hypothesis test (or one-tailed hypothesis test)we reject the null only if the evidence indicates that the population parameter is respectively greater than or less than θ0. The alternative hypothesis has one side.
Definition of Test StatisticA test statistic is a quantity, calculated based on a sample, whose value is the basis for deciding whether or not to reject the null hypothesis.
power of a testprobability of correctly rejecting the null—that is, the probability of rejecting the null when it is false
Definition of a Rejection Point (Critical Value) for the Test StatisticA rejection point (critical value) for a test statistic is a value with which the computed test statistic is compared to decide whether to reject or not reject the null hypothesis.
Definition of p-ValueThe p-value is the smallest level of significance at which the null hypothesis can be rejected.