Null hypothesis
The statement being tested, always containing the equality, and held until the evidence against it is strong enough to reject it. Failing to reject it does not show that it is true.
Where you will meet it
Null hypothesis appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set up the null and the alternative hypothesis
“The null hypothesis is the statement being tested, and it always contains the equality: it is the position held until the evidence is strong enough to abandon it.”
- Set out the stages of testing a series for a unit root (nonstationarity) and explain how the test connects to autoregressive models
“The null hypothesis is a unit root, with g1 equal to 0, and the alternative is stationarity, with g1 below 0.”
- Distinguish Type I from Type II errors when deciding whether to hire or keep a manager
“Take as the null hypothesis that the manager has no skill.”
- Explain what a p-value means and the two kinds of testing error
“A p-value is the probability of observing a result at least as extreme as the one obtained, if the null hypothesis were true.”
Practise it
Practise null hypothesis until it is automatic: questions that explain every wrong option.
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