Forecasts Using

Generate Data
Session 1 Hypothesis Testing
 COVARIANCE
Association & Causation

Always remember,
“
“
association does not
imply causation.
 COVARIANCE
Portfolio Management

Covariance is particularly useful tool for

understanding the variable relationship between
any two or more variables.

Portfolio management especially uses

Covariance to nullify investment risk by
selecting stocks or commodities not associated
together.

The concepts of Positive and Negative

covariance help in the selection of assets for any
portfolio. Positively related assets are generally
avoided as downturn and terrorise the entire
portfolio, whereas highly negatively related
assets can also neutralise the profit/loss
scenario. A balance has to be maintained.
 COVARIANCE – CORRELATION

Covariance is tool for identification of association of

variables.

Vs

Correlation is the normalized tool for

determining the degree of association of these
variables.
 CORRELATION
DRAWBACKS

“
Correlation only measures the linear association between
the variables. The nonlinear relationship cannot be
measured using this technique. It is, therefore, a positive
practice to pre-visualise the data to roughly estimate its
linearity. There are other correlation matrices, such as rank
and mutual information, which can be used to analyse the
.
nonlinear associations between the variables
.
 HYPOTHESIS TESTING
Claims & Beliefs

Remember that in the hypothesis testing parlance, we never ‘prove’ the null hypothesis.
We can only say that we ‘failed to reject’ the null hypothesis based on the evidence that
we have gathered.
TEST STATISTICS
Critical & P value

Critical Value is the set minimal value at

which a certain level of significance
crucial for the test is achieved.

P-value as the probability of getting a

test statistic at least as extreme as the
one observed under the assumption that
the null hypothesis is true
REJECTION REGIONS
Test - Types
Depending upon the side of the curve on which the
rejection region/critical value lies the nature of the
test is decided. The formulation of the null and
alternative hypotheses also determines the type of
the test and the position of the rejection region(s)
in the distribution of sample means.
Type of Tests

One tailed test

‘<’ in H⍺ → Left-tailed test → Rejection

region on the left side of the distribution

‘>’ in H⍺ → Right-tailed test → Rejection

region on the right side of the distribution

Two tailed test

‘≠’ in H⍺ → Two-tailed test → Rejection

region on both sides of the distribution
A/B TESTING
What and Why?
A/B TESTING
Uses

“
A/B testing is predominantly used to
deal with tests that generate categorical
data. The categories could include
True/False, 1/0, Yes/No, Male/Female,
Success/Failure, etc. Moving ahead, in
the next segment, you will learn how to
design an A/B testing experiment.
 CHI SQURE
DRAWBACKS

“
A chi-square statistic is one way to show a relationship
between two categorical variables. In statistics, there are
two types of variables: numerical (countable) variables and
non-numerical (categorical) variables. The chi-squared
statistic is a single number that tells you how much
difference exists between your observed counts and the
counts you would expect if. there were no relationship at all
in the population.
.
 CHI SQUARE
Application

01 02 03

Two Proportions Independence Expectation

When you wish to compare more When you wish to check the When you wish to see whether
than two proportions independence of attributes the sample data fits the
expectations set due to
population