CAIA Chapter 7: Hypothesis Testing in Alternative Investments

is usually a statement that the analyst is attempting to reject, typically that a particular variable has no effect or that the variable's true value is equal to zero

is the behavior that the analyst assumes would be true if the null hypothesis is rejected. The null and the alternative hypotheses are usually stated in such a way that they are mutually exclusive.

which is a function of observed values of the random variables and typically has a known distribution under the null hypothesis. The test statistic is the variable that is analyzed to make an inference with regard to rejecting or failing to reject the nul

are often used interchangeably to indicate the probability that a result may be due to randomness, in the case of the significance level, or not due to randomness, in the case of the confidence level (sig=1-5%; conf=95-99%)

indicated that there is only a 2% chance that the estimated value would occur given the assumption that the null hypothesis is true

describes the extent to which a variable in an economic model has a meaningful impact on another variable in a practical sense. One can be very confident about significance but size and dispersion of parameter may indicate that parameter has minor impact

false positive is when an analyst makes the mistake of falsely rejecting a true null hypothesis

also known as false negative is failling to reject the null when it is falese