FRM Part I · FRM Exam Part I · Hypothesis Testing
A risk team tests whether a model's average backtest error is zero. The test has a p-value of 0.03. Which interpretation is correct?
A p-value of 0.03 means that, if the null hypothesis were true, a test statistic at least as extreme as the one observed would occur about 3% of the time. It is not the probability that the null is true.
- AIf the true mean error were zero, results at least this extreme would occur about 3% of the timeCorrect
- BThere is a 3% probability that the null hypothesis is true
- CThere is a 97% probability that the alternative hypothesis is true
- DThe model error is 3% on average
Explanation
A p-value is the probability, assuming H0 is true, of obtaining a statistic at least as extreme as observed. It is not the probability that H0 is true, and its complement is not the probability that H1 is true.
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