DEFINITION of 'Alpha Risk'

The risk in a statistical test that a null hypothesis will be rejected when it is actually true. This is also known as a Type I error. The best way to decrease alpha risk is to increase the size of the sample being tested with the hope that the larger sample will be more representative of the population.


An example of alpha risk in finance would be if one wanted to test the hypothesis that the average yearly return on a group of equities was greater than 10%. So the null hypothesis would be if the returns were equal to or less that 10%. In order to test this, one would compile a sample of equity returns over time and set the level of significance. If, after statistically looking at the sample, you determine that the average yearly return is higher than 10%, you would reject the null hypothesis. But in reality, the average return was 6% so you have made a type I error. The probability that you have made this error in your test is the alpha risk. This alpha risk could lead you to invest in a group of equities when the returns do not actually justify the potential risks.

  1. Type II Error

    A statistical term used within the context of hypothesis testing ...
  2. Null Hypothesis

    A null hypothesis is a type of hypothesis used in statistics ...
  3. Beta Risk

    The probability that a false null hypothesis will be accepted ...
  4. P-Value

    The level of marginal significance within a statistical hypothesis ...
  5. Alpha

    Alpha, used in finance as a measure of performance, is the excess ...
  6. Sampling Error

    A statistical error to which an analyst exposes a model simply ...
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