Loading the player...

What is a 'Null Hypothesis'

A null hypothesis is 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 its mean. It is presumed to be true until statistical evidence nullifies it for an alternative hypothesis.

BREAKING DOWN 'Null Hypothesis'

The null hypothesis, also known as the conjecture, assumes that any kind of difference or significance you see in a set of data is due to chance. The opposite of the null hypothesis is known as the alternative hypothesis.

Difference Between Null and Alternative

The null hypothesis is the initial statistical claim that the population mean is equivalent to the claimed. For example, assume the average time to cook a specific brand of pasta is 12 minutes. Therefore, the null hypothesis would be stated as, "The population mean is equal to 12 minutes." Conversely, the alternative hypothesis is the hypothesis that is accepted if the null hypothesis is rejected.

For example, assume the hypothesis test is set up so that the alternative hypothesis states that the population parameter is not equal to the claimed value. Therefore, the cook time for the population mean is not equal to 12 minutes; rather it could be less than or greater than the stated value. If the null hypothesis is accepted or the statistical test indicates that the population mean is 12 minutes, then the alternative hypothesis is rejected. The opposite is true.

Hypothesis Testing for Investments

For example, Alice sees that her 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 Alice has to believe this until she proves otherwise. Refuting the null hypothesis would require showing statistical significance, which can be found using a variety of tests. Therefore, the alternative hypothesis would state that the investment strategy has a higher average return than a traditional buy-and-hold strategy.

The p-value is used to determine the statistical significance of the results. A p-value that is less than or equal to 0.05 is usually used to indicate whether there is strong evidence against the null hypothesis. The opposite is true. If Alice conducts one of these tests, such as a test using the normal model, and proves that the difference between her returns and the buy-and-hold returns is significant or the p-value is less than or equal to 0.05, she can then refute the null hypothesis and accept the alternative hypothesis.

RELATED TERMS
  1. P-Value

    The level of marginal significance within a statistical hypothesis ...
  2. Type I Error

    A type I error is a kind of error that occurs when a null hypothesis ...
  3. Type II Error

    A statistical term used within the context of hypothesis testing ...
  4. Alpha Risk

    The risk in a statistical test that a null hypothesis will be ...
  5. Linder Hypothesis

    An economic hypothesis that posits that countries that have similar ...
  6. Life-Cycle Hypothesis (LCH)

    The Life-Cycle Hypothesis (LCH) is an economic theory that pertains ...
Related Articles
  1. Investing

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  2. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  3. Insights

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  4. Investing

    Diversification Strategies: Stocks Vs. Gold

    When it comes to asset allocation, is gold a solid diversifying asset class?
  5. Investing

    How To Profit From An Inefficient Market

    Yes, it is possible to consistently beat the stock market.
  6. Investing

    3 Cases Against Buffett's Recommendation on Index Funds (BRK-A, GS)

    Learn why Warren Buffet believes index funds are the best choice for investors, but why they may not perform as well in 2016 as they did in past years.
RELATED FAQS
  1. Has the Efficient Market Hypothesis been proven correct or incorrect?

    Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
  2. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  3. Why does the efficient market hypothesis state that technical analysis is bunk?

    Learn about why there are strong conceptual differences between the efficient market hypothesis and technical analysis about ... Read Answer >>
  4. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center