Hypothesis Testing

Also known as:

Category: Statistics

A hypothesis test is a statistically based evaluation of a theory or belief about a population parameter. For example, given adequate data a hypothesis test could be constructed to assess the claim that, “the standard deviation of monthly returns for a portfolio is 5%.”

A hypothesis test generally consists of the following sequence of steps:

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 result of the test