FRM Part I · FRM Exam Part I · Hypothesis Testing
An analyst tests H0: mu = 0 against H1: mu ≠ 0 for the mean daily excess return of a fund and obtains a two-sided p-value of 0.034. Which conclusion is correct?
Reject the null at 5% but not at 1%. The p-value of 0.034 is the smallest significance level at which rejection occurs, so it is below 0.05 but above 0.01. It does not give the probability that the null hypothesis is true.
- AReject H0 at the 5% significance level but not at the 1% levelCorrect
- BReject H0 at both the 5% and 1% significance levels
- CFail to reject H0 at the 5% level but reject it at the 1% level
- DThere is a 3.4% probability that H0 is true
Explanation
The p-value is the smallest significance level at which H0 can be rejected. Since 0.034 < 0.05, reject at 5%; since 0.034 > 0.01, do not reject at 1%. The last option misreads the p-value as the probability that H0 is true, which it is not.
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