how null hypothesis testing is used in investments
as an example related to financial markets assume alice sees that her investment strategy produces higher average returns than simply buying and holding a stock the null hypothesis states that there is no difference between the two average returns and alice is inclined to believe this until she can conclude contradictory results refuting the null hypothesis would require showing statistical significance which can be found by a variety of tests the alternative hypothesis would state that the investment strategy has a higher average return than a traditional buy and hold strategy one tool that can determine the statistical significance of the results is the p value a p value represents the probability that a difference as large or larger than the observed difference between the two average returns could occur solely by chance a p value that is less than or equal to 0 05 often indicates whether there is evidence against the null hypothesis 3 if alice conducts one of these tests such as a test using the normal model resulting in a significant difference between her returns and the buy and hold returns the p value is less than or equal to 0 05 she can then reject the null hypothesis and conclude the alternative hypothesis 