Statistics - Hypothesis Testing

hypothesis testing

The statistical assessment of a statement or idea regarding a population

hypothesis testing procedure

1. state the hypothesis

2. select the appropriate test statistic

3. specify the level of significance

4. state the decision rule regarding the hypothesis

5. collect the sample and calculate the sample statistics

6. make a decision regarding the hypothesis

7. make a decision based on the results of the test

LOS11.a

null hypothesis

H0, the hypothesis that the researcher wants to reject.

alternative hypothesis

H1, is what is concluded if there is sufficient evidence to reject the null hypothesis.

one-tailed test

one-sided test.

ex. researcher wants to test to see if stock options return is greater than zero.

two-tailed test

two-sided test.

ex. researcher wants to test to see if the return on options is simply different from zero.

critical values

used in two-tailed test. rejection points.

decision (rejection) rule

Reject Ho if: test statistic > upper critical value or test statistic < lower critical value.

test statistic

The difference between the sample statistic and the hypothesized value, scaled by the standard error of the sample statistic.

test statistic = (sample stat. - hypothesized value)/standard error

significance level

the probability of making a type I error (rejecting null when its true).

decision rule

The decision rule for rejecting or failing to reject the null hypothesis is based on the distribution of the test statistic. LOS11.c

p-value

Probability of obtaining a test statistic that would lead to a rejection of the null hypothesis, assuming the null hypothesis is true. The smallest level of significance for which the null hypothesis can be rejected. LOS11.e