# Hypothesis Testing

## Also known as:

## Category: Statistics

A hypothesis test is a statistically based evaluation of a theory or belief about a population parameter. For example, given adequate data a hypothesis test could be constructed to assess the claim that, “the standard deviation of monthly returns for a portfolio is 5%.”

A hypothesis test generally consists of the following sequence of steps:

- State the hypothesis
- Select the appropriate test statistic
- Specify the level of significance
- State the decision rule regarding the hypothesis
- Collect the sample and calculate the sample statistics
- Make a decision regarding the hypothesis
- Make a decision based on the result of the test