FRM Part I · FRM Exam Part I · Hypothesis Testing
A risk analyst tests whether the mean daily P&L of a trading desk differs from zero. She sets H0: mu = 0 against H1: mu ≠ 0 at a 5% significance level. Which statement correctly describes the Type I error in this test?
A Type I error means rejecting the null hypothesis when it is actually true. Here that means concluding the desk's mean daily P&L differs from zero when it truly equals zero. Its probability is the significance level, 5%. Failing to reject a false null is a Type II error.
- ARejecting H0 when the true mean daily P&L is actually zeroCorrect
- BFailing to reject H0 when the true mean daily P&L is not zero
- CAccepting H1 only when the p-value exceeds 5%
- DRejecting H1 when the test statistic lies in the critical region
Explanation
A Type I error is rejecting a true null hypothesis. Its probability equals the significance level, here 5%. Option B describes a Type II error, which is the most tempting distractor.
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