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FRM: Hypothesis Testing

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Uploaded on Apr 15, 2008

This video illustrates two (2.5 really) ways to test the hypothesis: 1. With confidence intervals: is the hypothetical value inside the interval? 2. By computing a t value and comparing it to the critical t (or lookup t). 2.5 Finally, probably the best way is the compute the p value. In Excel, we can use the =TDIST(computed t, d.f., 2 tail) = 1.3%. This returns a significance level (alpha) for us. That means, with 98.7% confidence (1 - alpha) we can reject the null. The advantage is that we do not need to specify a confidence/significance, instead the significance is returned for us (i.e., the point at which we can reject the null) and we can decide whether it's enough.

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