**one tailed and two tailed tests**. Today we will learn about type I error and type II error and what they represent. So read on to find out what they are…

**‘s’**is the standard deviation of the sample

**Type I error and Type II error**

**Power of a test**

Power of a test is given by 1 – probability (Type II error). In other words it is the probability of rejecting the null when it is false. When more than one test statistic can be used, power of a test helps in deciding which one is to be used. Usually, the test statistic that has the highest power of test is used.

**T-test: **

T-test is the hypothesis test that uses the t-statistic. As already discussed earlier, T-statistic is used when the population variance is unknown, the sample size is large, or the sample size is small but the distribution of the population is normal or approximately normal.

**When the sample size is small and the distribution is non normal there is no reliable statistical test.**

**Z-test: **

Z-test is the hypothesis test that uses a z-statistic. Z-test is used when the population is normally distributed. When the population variance is known the z-statistic is given as,

**Although the t-statistic is considered a more appropriate measure when the population variance is unknown.**

**For solved examples please refer to CFA Institute Books and Schweser CFA notes. The problems can be easily solved using the CFA institute approved financial calculators. Please refer to CFA exam policy and CFA calculator Guide.**

[…] may also want to read: Demand and Supply Analysis (Part 1) Hypothesis testing (Part 2) Hypothesis testing (Part 1) Sampling and estimation (Part […]