Financial Risk Manager Part 1
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A Financial Risk Manager exam candidate conducts a hypothesis test using a 10% significance level. Which of the following statements are correct?
A. The significance level is equal to the size of the test
B. 5% of the total distribution will be in each tail rejection region if the test is 2-sided
C. 10% of the whole distribution will be in the rejection region if the test is 2-sided
D. All the above
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NNikitesh
A
The significance level is equal to the size of the test
B
5% of the total distribution will be in each tail rejection region if the test is 2-sided
C
10% of the whole distribution will be in the rejection region if the test is 2-sided
D
All the above
Explanation:
The significance level and the size of a test mean the same thing: they measure the proportion of the total distribution which is placed in the rejection region. If a 10% significance level is used, this implies that in total, 10% of the distribution must be in the rejection region. In case the test is 2-sided, this implies the significance level must be split into two equal halves, with 5% of the distribution located in each of the rejection regions. Therefore, all statements A, B, and C are correct, making option D the correct answer.
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