BFS 1024

Statistics For Finance

Topic 7: HYPOTHESIS
TESTING I
(One Sample Test)
Chap 7-1
 Chapter Topics

 Hypothesis testing
 Procedure of Hypothesis Testing with
different condition.

Chap 7-2
 Hypothesis Statement

A statement about the value of a population parameter

developed for the purpose of testing.

Hypothesis Testing

Used to determine whether the hypothesis is a reasonable

statement and should not be rejected, or is unreasonable
and should be rejected

Chap 7-3
Procedure of Hypothesis Testing

Step 1: Hypothesis statement

Step 2: Select significant level

& determine the critical values

Step 3: Test statistics

Step 4: Decision rule

Step 5: Decision making

Reject H0 Do not Reject H0

Chap 7-4
 Step One:
State the null & alternate hypotheses

Null Hypothesis (H0)

 A statement about the value of a population parameter
 Begin with the assumption that the null hypothesis is
true.
 Always contains “=“, “≤” or “” sign
 May or may not be rejected

Chap 7-5
 Step One:
State the null & alternate hypotheses

Alternative Hypothesis (H1)

 Is the opposite of the null hypothesis
 A statement that is accepted if the sample data
provides evidence that the null hypothesis is false.
 Never contains “=“, “≤” or “” sign
 Is generally the hypothesis that the researcher is
trying to prove.

Chap 7-6
 Example
 The average income of employees at a company was
reported more than RM1800. Find the evidence to
support the claim.

H0: m < RM1800

H1: m > RM1800
 The proportion of students who rent outside MMU
campus was estimated to be more than 15%. Find the
evidence that the claim is not true.

H0:  > 0.15

H1:  < 0.15
Chap 7-7
Type of Hypothesis Statement
Three possibilities regarding means:
The null hypothesis always contains equality.

Two Sided Test H0: = 0

H1: = 0

H0: < 0 Right Tail Test

H1: > 0
One Sided Test
H0: > 0 Left Tail Test
H1: < 0 Chap 7-8
 Class Exercise
 State the hypotheses for the following problems:

(1) Templer and Tomeo (2002) reported that the

population mean score on the quantitative portion of the
Graduate Record Examination (GRE) General Test for
students taking the exam 1994 to 1997 was 558. From
sampling, test whether the mean score of the GRE test is
same as reported or not.
 Class exercise - continued
( 2) A courier service advertises that its average
delivery time is less than 6 hours for local
deliveries. A random sample of times for 12
deliveries to an address across town was
recorded. These data are shown here. Is this
sufficient evidence to support the courier’s
advertisement?
 Step Two:
Select a Level of Significance

Type I Error (a)

 Also called level of significance
 Rejecting the null hypothesis when it is actually true.

Type II Error (b)

 Accepting the null hypothesis when it is actually false.

Chap 7-7
Table of Risk in Decision Making

Chap 7-12
 Step Two:
Determine the critical values
 The value that separates the rejection region &
the non-rejection region.
 The critical value depends on three factors:
 Level of significance, α
 Type of hypothesis statement; two-sided or one-
sided test
 Type of test; Z-test or t-test

Chap 7-13
 Critical Values
Sample of a Two-Tailed Test
Region of Rejection Region of Rejection
(RR) (RR)

Critical Values
Reject H0 if the Reject H0 if the
test statistic < critical value test statistic > critical value
Step 2: Determine the critical values
Claim: The population mean
a/2 Represents
age is 50. critical value
a/2
H0: μ = 50
H1: μ ≠ 50 Two-tailed test

H0: μ ≤ 50 Upper-tailed a
test
Rejection
H1: μ > 50 region is
0 shaded

H0: μ ≥ 50 Lower-tailed a
test
H1: μ < 50
0
 Step Three:
Choose the suitable Test Statistic

Test statistic

 A value, determined from sample information, used to

determine whether or not to reject the null hypothesis.
 Z- test or t-test to be used

Chap 7-9
 Hypothesis Testing

Population Population
Mean Proportion

s known s unknown

z-test
z-test t-test

Chap 7-17
Test Statistic
Hypothesis Testing on Population Mean :
X m
Z
s When s is known
n

X m
t
s When s is unknown
n

Hypothesis Testing on Population Proportion :

p 
Z
 (1   )
n
Chap 7-18
 Step 4: Decision Rule - Test Statistic Approach

Two-Sided Test
Reject H0 if
Z-test statistic <  Z a / 2 or Z-test statistic > Za /2

t-test statistic <  ta / 2;n1 or t-test statistic > ta / 2;n 1

Left-Tail Test Right-Tail Test

Reject H0 if Reject H0 if
Z-test statistic <  Z a Z-test statistic > Za
t-test statistic <  ta ;n1 t-test statistic > ta ; n 1
Chap 7-19
 Decision Rule : p-value Approach

p – value
 known as the observed level of significance.
 It is the smallest level at which H0 can be rejected
for a given set of data.

Reject H0 if p – value < a

Fail to reject H0 if p – value  a

Chap 7-14
 Step Five:
Decision Making

Conclusion :
Reject H0 or Do Not Reject H0 by
 comparing the test-statistic with the critical value
or
 comparing the p-value with a .

Chap 7-21
 EXAMPLE 1
The company claims that its bottle contains 16 ounces
of ketchup. The standard deviation of the content is
known to be 0.5 ounces. A sample of 36 bottles from
the production revealed a mean weight of 16.12 ounces
per bottle. At the 0.05 significance level, is the
production different from 16 ounces?

Is the population standard deviation known?

Answer: s known ==> use z-test

Chap 7-22
 Test for the Population Mean (s known)
n  36 X  16.12 s  0.5 a  0.05
Hypothesis H0: m = 16 ounces
H1: m  16 ounces (Two-tailed test)

Level of Significance a  0.05

Critical-value Za/2  Z0.05/2   1.96

X m 16.12  16.00
Test-statistic z   1.44
s n 0.5 36
Since Z-test  1.44 is within Z0.05/2   1.96,
Conclusion
so, Do Not Reject H0 Chap 7-23
What is the p-value?

The calculated Z-test statistic  1.44, thus, the

p-value = 1 - 0.9251 = 0.0749 (2 tails) = 0.1498

Decision rule:
If the p-value  a ==> Do Not Reject H0
If the p-value < a ==> Reject H0

Since the p-value = 0.1498 > a = 0.05, so

Do Not Reject H0 and conclude that the production
is not different from 16 ounces.
Chap 7-24
 EXAMPLE 2
Lisa, the credit manager, wants to find out if the mean
monthly unpaid balance is more than $400. The level
of significance is set at 0.05. A random check of 172
unpaid balances revealed the sample mean to be $407.
Based on previous records, the standard deviation was
estimated to be $38.

Is the population standard deviation known?

Answer: s known ==> use z-test

Chap 7-25
 Test for the Population Mean (s known)
n  172 X  $407 s  $38 a  0.05
Hypothesis H0: m < $400
H1: m > $400 (One-tailed test)

Level of Significance a  0.05

Critical-value Za  Z0.05  1.645

X  m 407  400
Test-statistic z    2.42
s n 38 172
Since Z-test  2.42 > Z0.05  1.645, so,
Conclusion
Reject H0. Chap 7-26
What is the p-value?

The calculated Z-test statistic  2.42, thus, the

p-value = 1 - 0.99224 = 0.00776

Decision rule:
If the p-value  a ==> Do Not Reject H0
If the p-value < a ==> Reject H0

Since the p-value = 0.00776 < a = 0.05, so,

Reject H0

Chap 7-27
 EXAMPLE 3
The current rate for producing 5 amp fuses is 250 per
hour. A new machine has been purchased and installed
that, according to the supplier, will increase the
production rate. The production hours are normally
distributed. A sample of 10 randomly selected hours
from last month revealed that the mean hourly production
on the new machine was 256, with a sample standard
deviation of 6 per hour.
At the 0.05 significance level, can we conclude that
the new machine is faster?

Is the population standard deviation known?

Answer: s unknown ==> use t-test Chap 7-28
 Test for the Population Mean (s unknown)
n  10 X  256 s  6 a  0.05
Hypothesis H0: m < 250
H1: m > 250 (One-tailed test)

Level of Significance a  0.05

Critical-value ta,n1  t0.05,9  1.833

X  m 256  250
Test-statistic t    3.16
s n 6 10
Since t-test  3.16 > t0.05,9  1.833, so,
Conclusion
Reject H0 Chap 7-29
 EXAMPLE 4

In the past, 15% of the mail order solicitations for a

certain charity resulted in a financial contribution.
A new solicitation letter that has been drafted is sent
to a sample of 200 people and 25 responded with a
contribution.

At the 0.05 significance level, can it be concluded that

the proportion of contribution has decreased?

Chap 7-24
 Test for the Population Proportion
n  200 p  25
200
 0.125 a  0.05

Hypothesis H0:  > 0.15

H1:  < 0.15 (One-tailed test)
Level of Significance a  0.05
Critical-value Za   Z0.05  1.645

Test- p  0.125  0.15

z   0.99
statistic  (1   ) 0.15(0.85)
n 200
Since Z-test  0.99 > - Z0.05  1.645, so,
Conclusion
Do Not Reject H0 Chap 7-31
What is the p-value for the previous example?

z-test statistic = - 0.99

Thus, the p-value = 1 – 0.8389 = 0.1611

If you had used the p-value approach, would you have a

different conclusion?

Since p-value is > a , therefore we do not reject H0.

Thus I have the same conclusion.

Chap 7-32
 EXERCISE 1

An article reported that the mean amount of leisure time

per week for Malaysian men is 40 hours. You believe
this figure is too large & decide to conduct your own
test.
In a random sample of 60 men, you find that the mean is
37.8 hours of leisure per week. The population standard
deviation is estimated to be 12.2 hours.
Can you conclude that the mean hours of leisure is less
than what it is claimed in the article? Use the 0.05 level
of significance.
What is the p-value?
Chap 7-33
 EXERCISE 2
Kurnia Insurance reports that the mean cost to process a
claim is RM60. An industry comparison showed this
amount to be larger than most other insurance
companies, so they implemented cost-cutting measures.
To evaluate the effect, a random sample of 12 claims (in
RM) processed last month was taken.
45 48 62 40 78 51 54 68 38
44 63 43
At the 0.01 level of significance, is it reasonable to
conclude that the mean cost to process a claim is now
less than RM60?
Chap 7-34
 EXERCISE 3

A random sample of 12 mutual funds that are classified

as taxable money market funds were taken.
The sample revealed a mean of 4.57%. On the basis of
previous studies, the standard deviation was estimated to
be 0.23%.
At the 0.05 level of significance, is it reasonable to
conclude that the mean rate of return is different than
4.5%?
What is the p-value?

Chap 7-35