Hi David,
In the FRM handbook section 3.1.4- choosing significance level for tests, Jorion says, increasing the level of significance will decrease the probability of Type I error and increase the probability of Type II error. However,
in a 2009 FRM question, which is as follows
When testing a hypothesis, which of the following statements is correct when the level of significance of the
test is decreased?
Option a is the correct answer
The likelihood of rejecting the null hypothesis when it is true decreases, in other words, probability of Type I error decreases
Is Jorion's explanation correct? It seems to contradict the FRM exam question
Also, when the level of significance decreases for given number of df's, the critical value increases
which makes rejecting the null more harder, in other words the probability of committing a Type II error increases, is that correct?
Can you please clarify this statement, as it has left me confused
Thanks
Sundeep
In the FRM handbook section 3.1.4- choosing significance level for tests, Jorion says, increasing the level of significance will decrease the probability of Type I error and increase the probability of Type II error. However,
in a 2009 FRM question, which is as follows
When testing a hypothesis, which of the following statements is correct when the level of significance of the
test is decreased?
Option a is the correct answer
The likelihood of rejecting the null hypothesis when it is true decreases, in other words, probability of Type I error decreases
Is Jorion's explanation correct? It seems to contradict the FRM exam question
Also, when the level of significance decreases for given number of df's, the critical value increases
which makes rejecting the null more harder, in other words the probability of committing a Type II error increases, is that correct?
Can you please clarify this statement, as it has left me confused
Thanks
Sundeep