Null Hypothesis

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DEFINITION of 'Null Hypothesis'

A type of hypothesis used in statistics that proposes that no statistical significance exists in a set of given observations. The null hypothesis attempts to show that no variation exists between variables, or that a single variable is no different than zero. It is presumed to be true until statistical evidence nullifies it for an alternative hypothesis.

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BREAKING DOWN 'Null Hypothesis'

The null hypothesis assumes that any kind of difference or significance you see in a set of data is due to chance.

For example, Chuck sees that his investment strategy produces higher average returns than simply buying and holding a stock. The null hypothesis claims that there is no difference between the two average returns, and Chuck has to believe this until he proves otherwise. Refuting the null hypothesis would require showing statistical significance, which can be found using a variety of tests. If Chuck conducts one of these tests and proves that the difference between his returns and the buy-and-hold returns is significant, he can then refute the null hypothesis.

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