Level of Significance:-

1) It is the probability of rejecting a true null hypothesis. (Type –I Error α).

2) It is generally fixed at 1%, 5%, 10% or 25% and denoted by symbol alpha α .
3) The choice of the level of significance is made after evaluating how much risk the researcher
is willing to accept and what impact will it have on beta β (Type – II) error/risk.
4) If we wants to reduce the probability of committing Type – II error ( β )then it will increase the
probability of committing Type – I error (α ). Ex- 25% of level of significance means there are
25 out of 100 chances of committing Type – I error (α ).

Power of a Test:-
1) It signifies how well the test is working.
2) A good test of hypothesis would be one that rejects a null hypothesis when it is false or lower
the probability of accepting a null hypothesis that is false (Type – II, β ).
3) It can also be said that a good test should have a high (1 – β).
4) The closer the value of (1 – β) to 1, the better is the test working and a high (1 – β) ensures
that the researcher has the best chance of rejecting a null hypothesis when it is false.

The power of test depends on three parameters:

(1) Significance level of the test.

(2) The reliability of the sample size.
(3) The effect size. (It is the difference between the assumed value under the null and the true but
unknown value).
5) If the (1 – β ) value of all possible values of a population parameter are plotted. for which the
H0 is not true, the resulting curve is known as the POWER CURVE.
6) POWER CURVE shows the conditional probability associated with rejecting H0 as a function of
two things namely population parameter and sample size.

Hypothesis Testing Procedure:-

The basic objective of hypothesis testing is to judge whether a difference actually exist
between the two values of sample or population which is done by proving or disapproving the
null hypothesis.

The process of testing Hypothesis is as fallows:-

1) Formulate the Hypothesis:-

1) The researcher start with clearly defining the problem.2) once that has been achieved
the researcher is in the position to define the null hypothesis and alternative
hypothesis. 3) Null Hypothesis is a statement of no change or difference.4) An
Alternative Hypothesis is one in which some difference/effect is expected to take place.
5) The alternate hypothesis is opposite of null hypothesis and rejection of null hypothesis
leads to acceptance of alternative hypothesis and vice-versa.

2) Select Relevant Test and Probability Distribution:-

1) In the next step, it is necessary to select a statistical technique and probability
distribution. 2) The choice of probability distribution depends on the purpose of the

Hypothesis Testing By Ankur Sharma [Disha Bharti College Of Management & Education ] Page 1
 hypothesis testing.3) The researcher should carefully see how the test statistic is
computed and which sampling distribution is it following i.e. normal, t or chi ( χ 2 )
distribution.

3) Choosing a Critical Value:-

1) The next step involves deciding up on the criteria for accepting the null hypothesis. This involves
decision on (a) Significance Level. (b) Degree Of Freedom. (c) One or Two tail test.

(a) Significance level must be specified in percentage terms. It indicates the number of sample
means out of 100 that are outside of cut-off limits. Ex- A 5 % significance level states that there are 5
chances out of 100 of not accepting null hypothesis when it is actually true. Choice of correct
significance level depend on the cost involved in committing an α and β error.

(b) Degree of freedom refers to the free data used in calculating a sample or test statistic. It is
calculated by: d.f. = n – k [where n = number of information items available, k = number of linear
constraints]

For example in case of mean the degree of freedom is n since there are no constraints. However
when we calculate variance there is a constraints as mean has to first calculated. Hence the degrees
of freedom are (n – 1).

(c) Decision on one-tail test or two-tail test. In case of two-tail test there are two rejection regions
on either side of the curve where as in case of one-tail test the rejection region lies on one side of the
curve only. This decision is influenced by the alternative hypothesis.

4) Collect Data and Test Statistic/Calculated value:-

1) The next stage involve drawing a sample and collecting data using a data collection strategy
that is according to the purpose of the study.2) From this data the test statistic is computed. 3) It is
this test statistic that determines how close the sample is to null hypothesis.

5) Compare the Test statistic/calculate value and critical value:-

1) Here the test statistic/calculated value is compared with the critical value specified.2) For
Example- If Z –Distribution is being used then to test a two tailed test at 5% level of significance with
(n – 1) degree of freedom involves calculating the Z-value from the sample data (called the test
statistic ).It is then compared to Z-critical value at 5% (i.e. | 1.96 |).

6) Taking the Final Decision:-

1) At this step, researcher has to now make a decision of accepting or not accepting a null
hypothesis.2) For Example- If the Z-value calculated from the sample lies in the critical region i.e. if
Z -test statistic > | 1.96 | then it is in the rejection region and null hypothesis will be rejected. If
however Z- test statistic value < | 1.96 | then it is in acceptance region and null hypothesis will
be accepted.

Type of Hypothesis Tests:-

1) Parametric Tests :-

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 1) Parametric tests are based on some assumptions about the parent population from which
the sample has been drawn.
2) These assumptions can be with respect to sample size, type of distribution or on population
parameters like means,standard deviation etc.
3) The most commonly used parametric tests are Z-test, t-test and χ2 (chi) test (however
when χ is used as test of good of fit or as a test of independence, it is known as non-
parametric test).
4) Parametric tests are more powerful than non-parametric tests as they use interval and ratio
data.

Parametric tests are based on certain assumptions:-

1) The observations being tested should be independent so that inclusion of one set of
observation does not effect the subsequent observations.
2) Distribution must be normality.
3) It requires interval or ratio measurement scales, so that arithmetic operations can be
applied on them.

Z-test:-

1) ‘Z’ test is a popular test for judging the significance of mean and populations.
2) The ‘Z’ test is used for t-distribution and binomial or poisson distribution also when the size
of the sample is very large on the presumption that such a distribution tends to
approximate normal distribution as sample size becomes larger.
3) The critical ‘Z’ value is found out from the table showing the area under a normal curve at a
specified level of significance.
4) This ‘Z’ value is compared with the calculated Z-statistic for judging the significance of
measure concern.
T-test:-
1) It is a univariate test that uses t-distribution for testing sample and population when the size
of sample is small (i.e. less than 30).
2) The t-distribution is symmetrical bell-shaped curve.
3) The variance of t-distribution approaches the variance of standard normal distribution as
the sample size increases.
4) It can be seen the t-distribution is bell shaped.
5) At infinite degree of freedom the t-distribution and normal distribution are exactly equal.
6) Thumb rule is that when n>30 (sample size is large) then normal distribution is used. But
when n<30 (sample size is small) then t- distribution is used.

F-test:-

1) It is based on F-distribution.
2) It is generally used to compare the variance of two sets of observations.
3) F- Distribution is a frequency distribution that uses two sets of the degree of freedom i.e.
one in numerator and one in denominator.
4) ANOVA is a case of using F-test to compare variance.

Chi Test (χ):-

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 1) ‘Χ2’ as a parametric test is used to compare a sample variance to some theoretical
population variance.
2) It based on Chi-square distribution.

Non-Parametric Test:-

1) These are the distribution tests that are not dependent on assumptions regarding a
population distribution.
2) They test hypothesis on nominal and ordinal data.
3) They lay less emphasis on assumptions hence the chances of committing type-II error i.e.
of accepting a false null hypothesis is high.
4) They are quick and easy to use as compare to parametric tests.
5) These tests may be extended to interval and ratio data but a lot of information would be
wasted on them.
6) Some examples are (1) Mann-Whitney test. (2) Sign test etc.

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