CFA Practice Question

CFA Practice Question

Which of the following answers is false in reference to confidence levels and/or tests of significance? Choose the best answer.
A. All else being equal, the confidence interval for a test with a 5% significance level is larger than the confidence interval for a test with a 1% significance level.
B. The Greek letter alpha is used to denote the probability of a Type I error. The confidence level can be found by (1 - alpha).
C. In most hypothesis testing, the power of a test is equal to (1 - Type II error probability).
Explanation: The confidence interval for a test with a 5% level of significance is smaller than the confidence interval for one with a 1% significance level. Remember that the significance level is typically set equal to the probability of a Type I error, which is defined as the act of incorrectly rejecting the null hypothesis. In hypothesis testing, the significance level is denoted by the Greek letter alpha. As the level of confidence increases, the confidence interval will increase. This will be mirrored by a decrease in the alpha coefficient (i.e., the probability of a Type I error) for the hypothesis test.

The remaining answers are correct.

User Contributed Comments 8

User Comment
danlan 1)alpha=prob(type I error)

Is it significance level?

2)confidence level=1-alpha
3)power of test=1-prob(type II error)
steved333 always be sure to get whether the question is asking for which is true vs which is false!!
boddunah pay attention to " true" or "false"
HolzGe1 Why is C correct? It says the power of a test is equal to (1 - type II error probability) for _MOST_ hypothesis testing. Isnt that true for _EVERY_ hypothesis testing?
HolzGe1 Ah, "best answer", I guess...
marattus HolzGe1, I think they meant that the question is asking for the best answer for about Confidence level/test of significance. So, while B and C are also correct, but are related to Hypothesis testing, rather than the CL. Though I am with you on this - since all of these are interrelated, it can become too subjective when one tries to define what comes first depending on where you start from.
marattus HolzGe1, correction )) I just realized it asked for the False answer...
ashish100 Alpha, Significance level, and Prob. of Type I error all the same intellectual shenanigans.

Danlan summarized the formulas pretty good up there.
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