LM05 Sampling and Estimation IFT Notes

LM05 Sampling and Estimation 2023 Level I Notes
LM05 Sampling and Estimation
1. Introduction ...........................................................................................................................................................2
2. Sampling Methods ...............................................................................................................................................2
2.1 Simple Random Sampling ........................................................................................................................3
2.2 Stratified Random Sampling ...................................................................................................................3
2.3 Cluster Sampling ..........................................................................................................................................4
2.4 Non-Probability Sampling........................................................................................................................5
2.5 Sampling from Different Distributions ...............................................................................................5
3. The Central Limit Theorem and Distribution of the Sample Mean ..................................................5
3.1 The Central Limit Theorem .....................................................................................................................6
3.2 Standard Error of the Sample Mean .....................................................................................................6
4. Point Estimates of the Population Mean.....................................................................................................6
4.1. Point Estimators .........................................................................................................................................7
5. Confidence Intervals for the Population Mean and Sample Size Selection ...................................7
5.1 Selection of Sample Size......................................................................................................................... 10
6. Resampling .......................................................................................................................................................... 11
7. Sampling-Related Biases................................................................................................................................ 12
7.1 Data-Snooping Bias.................................................................................................................................. 12
7.2 Sample Selection Bias ............................................................................................................................. 13
7.3 Look-Ahead Bias ....................................................................................................................................... 13
7.4 Time-Period Bias ...................................................................................................................................... 13
Summary................................................................................................................................................................... 14
This document should be read in conjunction with the corresponding reading in the 2023 Level I
CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright
2022, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights
reserved.
Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of
the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are
trademarks owned by CFA Institute.
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1. Introduction
A sample is a subset of a population. We can study a sample to infer conclusions about the
population itself. For example, if all the stocks trading in the US are considered a population,
then indices such as the S&P 500 are samples. We can look at the performance of the S&P
500 and draw conclusions about how all stocks in the US are performing. This process is
known as sampling and estimation.
2. Sampling Methods
There are various methods for obtaining information on a population through samples. The
information we obtain usually concerns a parameter, a quantity used to describe a
population. To estimate a parameter, we use sample statistics. A statistic is a quantity used
to describe a sample.
There are two reasons why sampling is used:
• Time saving: In many cases it will be very time consuming to examine every member
of the population.
• Monetary saving: In some cases, examining every member of the population
becomes economically inefficient.
There are two types of sampling methods:
 Probability sampling: Every member of the population has an equal chance of being
selected. Therefore, the sample created is representative of the population.
 Non-probability sampling: Every member of the population may not have an equal
chance of being selected. This is because sampling depends on factors such as the
sampler’s judgement or the convenience to access data. Therefore, the sample created
may not be representative of the population.
All else equal, the probability sampling method is more accurate and reliable as compared to
the non-probability sampling method.
In the subsequent sections, we will discuss the following sampling methods:
 Probability sampling
o Simple random sampling
o Systematic sampling
o Stratified random sampling
o Cluster sampling
 Non-probability sampling
o Convenience sampling
o Judgement sampling
2.1 Simple Random Sampling
Simple random sampling is the process of selecting a sample from a larger population in

such a way that each member of the population has the same probability of being included in
the sample.
Sampling distribution
If we draw samples of the same size several times and calculate the sample statistic, the
sample statistic will be different each time. The distribution of values of the sample statistic
is called a sampling distribution.
For example, say you select 100 stocks from a universe of 10,000 stocks and calculate the
average annual returns of these 100 stocks. Let’s say you get an average return of 15%. You
repeat this process with a second sample of 100 stocks. This time, you get an average return
of 14%. You keep repeating this process and each time you get a different average return.
The distribution of these sample average returns is called a sampling distribution.
Sampling error
Sampling error is the difference between a sample statistic and the corresponding
population parameter.
The sampling error of the mean is given by:
Sampling error of the mean = x̅ − μ
For example, let’s say you want to estimate the average returns of 10,000 stocks. You draw a
sample of 100 stocks and calculate the average return of these 100 stocks as 15%. However,
the actual average of the 10,000 stocks was 12%. Then the sampling error = 15% - 12% =
3%.
Systematic sampling: In this technique, we select every kth member of the population until
we have a sample of the desired size. Samples created using this technique should be
approximately random.
Instructor’s Note: Researchers calculate the sampling interval ‘k’ by dividing the entire
population size by the desired sample size.
2.2 Stratified Random Sampling
In stratified random sampling, the population is divided into subgroups based on one or
more distinguishing characteristics. Samples are then drawn from each subgroup, with
sample size proportional to the size of the subgroup relative to the population. Finally,
samples from each subgroup are pooled together to form a stratified random sample.
The advantage of stratified random sampling is that the sample will have the same
distribution of key characteristics as the overall population. This can help reduce the
sampling error. Stratified random sampling therefore produces more precise parameter
estimates than simple random sampling
For example, you divide the universe of 10,000 stocks as per their market capitalization such

that you have 5,000 large cap stocks, 3,000 mid cap stocks, and 2,000 small cap stocks. In
stratified random sampling, to select a total sample of 100 stocks, you will randomly select
50 large cap stocks, 30 mid cap stocks, and 20 small cap stocks and pool all these samples
together to form a stratified random sample.
Example
Paul wants to categorize publicly listed stocks for his research project. He first divides the
stocks into 15 industries. Then from each industry, he categorizes companies into three
groups: small, medium, large. Finally, he divides these into value versus growth stocks. How
many cells or strata does the sampling plan entail?
A. 20
B. 45
C. 90
Solution:
C is correct. This is an application of the multiplication rule of counting. The total number of
cells is the product of 15, 3, and 2. Thus the answer is 90.
2.3 Cluster Sampling
Cluster sampling is similar to stratified random sampling as it also requires the population to
be divided into subpopulation groups, called clusters. Each cluster is essentially a mini-
representation of the entire population. Then some random clusters are chosen as a whole
for sampling.
Instructor’s Note: Clusters are generally based on natural groups separating the population.
For example, you might be able to divide your data into natural groupings like city blocks,
voting districts, or school districts.
The main difference between cluster sampling and stratified random sampling is that in
cluster sampling, the whole cluster is selected; and not all clusters are included in the
sample. In stratified random sampling, however, only a few members from each stratum are
selected; but all strata are included in the sample.
The difference between simple random sampling, stratified random sampling, and cluster
sampling is illustrated in the figure below:
As compared to SRS and stratified sampling, cluster sampling is less accurate because the

chosen sample may be less representative of the entire population. However, this method is
the most time-efficient and cost-efficient amongst the three.
2.4 Non-Probability Sampling
The two major types of non-probability sampling methods are:
 Convenience sampling: In this method, the researcher selects members from a
population based on how easy it is to access the member i.e., data is collected from a
conveniently available pool of respondents. The disadvantage of this method is that
the sample selected may not be representative of the entire population. The
advantage is that data can be collected quickly and at a low cost. Hence this method is
particularly suitable for small-scale pilot studies.
 Judgmental sampling: In this method, the researcher uses his knowledge and
professional judgment to selectively handpick members from the population. The
disadvantage of this method is that the sampling may be impacted by the researcher’s
bias and the results may be skewed. The advantage of this method is that it allows the
researcher to directly go to the target population of interest. For example, when
auditing financial statements, experienced auditors can use their professional
judgment to select important accounts or transactions that can provide sufficient
audit coverage.
2.5 Sampling from Different Distributions
Instructor’s Note: This section does not contain testable concepts. The core point is
presented below.
In addition to selecting an appropriate sampling method, researchers also need to be careful
when sampling from a population that is not under one single distribution. In such cases, the
larger population should be divided into smaller parts, and samples should be drawn from
the smaller parts separately.
3. The Central Limit Theorem and Distribution of the Sample Mean
The sample mean is a random variable with a probability distribution known as the
statistic’s sampling distribution. To understand this concept, consider the following
population: last year’s returns on every stock traded in the United States. We are interested
in the mean return of all stocks but do not have time to calculate the population mean.
Hence, we draw a sample of 50 stocks and compute the sample mean. We then draw another
sample of 50 stocks and compute the sample mean. This exercise can be repeated several
times giving us a distribution of sample means. This distribution is called the statistic’s
sampling distribution. The central limit theorem, explained below, helps us understand the
sampling distribution of the mean.

3.1 The Central Limit Theorem

According to the central limit theorem, if we draw a sample from a population with a mean µ
and a variance σ2, then the sampling distribution of the sample mean:
 will be normally distributed (irrespective of the type of distribution of the original
population).
 will have a mean of µ.
 will have a variance of σ2/n.
For example, suppose the average return of the universe of 10,000 stocks is 12% and its
standard deviation is 10%. Through central limit theorem we can conclude that if we keep
drawing samples of 100 stocks and plot their average returns, we will get a sampling
distribution that will be normally distributed with mean = 12% and variance of 102/100 =
1%.
3.2 Standard Error of the Sample Mean
The standard deviation of the distribution of the sample means is known as the standard
error of the sample mean.
When we know the population standard deviation, the standard error of the sample mean
can be calculated as:
σ
σX̅ =
√n
When we do not know the population standard deviation (σ) we can use the sample
standard deviation (s) to estimate the standard error of the sample mean:
s
sX̅ =
√n
Example
The mean of a population is 12 and the standard deviation is 3. Given that the population
comprises of 64 observations, what is the standard error of the sample mean?
A. 0.375
B. 0.378
C. 0.667
Solution:
A is correct. Standard Error = σ/√n = 3/√64 = 0.375
4. Point Estimates of the Population Mean
Statistical inference consists of two branches: 1) hypothesis testing and 2) estimation.
Hypothesis testing addresses the question ‘Is the value of this parameter equal to some
specific value?’ This is discussed in detail in the next reading. In this section, we will discuss

estimation. Estimation seeks to answer the question ‘What is this parameter’s value?’ In
estimation, we make the best use of the information in a sample to form one of several types
of estimates of the parameter’s value.
A point estimate is a single number that estimates the unknown population parameter.
Interval estimates (or confidence intervals) are a range of values that bracket the unknown
population parameter with some specified level of probability.
4.1. Point Estimators
The formulas that we use to compute the sample mean and all other sample statistics are
examples of estimation formulas or estimators. The particular value that we calculate from
sample observations using an estimator is called an estimate. For example, the calculated
value of the sample mean in a given sample is called a point estimate of the population
mean.
The three desirable properties of an estimator are:
 Unbiasedness: Its expected value is equal to the parameter being estimated.
 Efficiency: It has the lowest variance as compared to other unbiased estimators of the
same parameter.
 Consistency: As sample size increases, the sampling error decreases and the
estimates get closer to the actual value.
5. Confidence Intervals for the Population Mean and Sample Size Selection
A confidence interval is a range of values, within which the actual value of the parameter will
lie with a given probability. Confidence interval is calculated as:
Confidence interval = point estimate ± (reliability factor x standard error)
where:
point estimate = a point estimate of the parameter
reliability factor = a number based on the assumed distribution of the point estimate and
the degree of confidence (1 - α) for the confidence interval
standard error = standard error of the sample statistic providing the point estimate
The quantity ‘reliability factor x standard error’ is also referred to as the precision of the
estimator. Larger values indicate lower precision and vice versa.
Calculating confidence intervals
To calculate a confidence interval for a population mean, refer to the table below and select t
statistic or z statistic as per the scenario.
Small sample Large sample
Sampling from
size(n<30) size(n≥30)
Normal Variance known z z
distribution Variance unknown t t (or z)

Non –normal Variance known NA z

distribution Variance unknown NA t (or z)
Use the following formulae to calculate the confidence interval:
σ
Confidence interval = ̅X ± zα/2
√n
s
Confidence interval = ̅X ± t α/2
√n
Sampling from a normal distribution with known variance
The most basic confidence interval for the population mean arises when we are sampling
from a normal distribution with known variance.
The confidence interval will be calculated as:
σ
Confidence Interval = X ̅ ± zα/2
√n
where:
X̅ = sample mean
zα/2 = reliability factor
σ/√n = standard error
The reliability factor ( zα/2 ) depends purely on the degree of confidence. If the degree of
confidence (1 – α) is 95% or 0.95, the level of significance (α) is 5% or 0.05. α/2 = 0.025. α/2
is the probability in each tail of the standard normal distribution. This is shown in blue in the
figure below:
The reliability factors that are most frequently used when we construct confidence intervals
based on the standard normal distribution are:
• 90% confidence intervals: α = 0.1, α/2 = 0.05. Reliability factor = z0.05 = 1.65
Memorize these confidence intervals and the corresponding reliability factors.

Example
You take a random sample of stocks on the National Stock Exchange (NSE). The sample size
is 100 and the average Sharpe ratio is 0.50. Assume that the Sharpe ratios of all stocks on
the NSE follow a normal distribution with a standard deviation of 0.30. What is the 90%
confidence interval for the mean Sharpe ratio of all stocks on the NSE?
Solution:
σ 0.30
Confidence Interval = ̅
X ± zα/2 = 0.50 ± 1.65 = 0.50 ± 0.0495
√n √100
Therefore, the 90% confidence interval for the mean Sharpe ratio of all stocks on the NSE is:
0.4505 to 0.5495.
As we increase the degree of confidence, the confidence interval becomes wider. If we use a
95% confidence interval, the reliability factor is 1.96. And the confidence interval ranges
from 0.50 – 1.96 x 0.03 to 0.50 + 1.96 x 0.03 which is: 0.4412 to 0.5588. This range is wider
than what we had with a 90% confidence interval.
Sampling from a normal distribution with unknown variance
If the distribution of the population is normal with unknown variance, we can use the t-
distribution to construct a confidence interval.
The confidence interval can be calculated using the following formula:
s
Confidence Interval = ̅X ± t α/2
√n
This relationship is similar to what we’ve discussed before except here we use the t-
distribution. Since the population standard deviation is not known, we have to use the
sample standard deviation which is denoted by the symbol ‘s’. We will now see how to read
the t-distribution table using an example.
Example
Given a sample size of 20, what is the reliability factor for a 90% confidence level?
Solution:
In order to answer this question, we need to refer to the t-table. A snapshot of the table is
given below. This table shows the level of significance for one-tailed probabilities.
df P = 0.10 P = 0.05 P = 0.025 P = 0.01 P = 0.005
1 3.078 6.314 12.706 31.821 63.657
2 1.886 2.920 4.303 6.965 9.925
3 1.638 2.353 3.182 4.541 5.841
4 1.533 2.132 2.776 3.747 4.604
5 1.476 2.015 2.571 3.365 4.032

6 1.440 1.943 2.447 3.143 3.707

7 1.415 1.895 2.365 2.998 3.499
8 1.397 1.860 2.306 2.896 3.355
9 1.383 1.833 2.262 2.821 3.250
10 1.372 1.812 2.228 2.764 3.169
11 1.363 1.796 2.201 2.718 3.106
12 1.356 1.782 2.179 2.681 3.055
13 1.350 1.771 2.160 2.650 3.012
14 1.345 1.761 2.145 2.624 2.977
15 1.341 1.753 2.131 2.602 2.947
16 1.337 1.746 2.120 2.583 2.921
17 1.333 1.740 2.110 2.567 2.898
18 1.330 1.734 2.101 2.552 2.878
19 1.328 1.729 2.093 2.539 2.861
20 1.325 1.725 2.086 2.528 2.845
The degrees of freedom in this case are n – 1 = 20 – 1 = 19. The level of significance is
calculated as: 100(1 - α) % = 90% and α = 0.10. In order to calculate the reliability factor
𝑡𝛼/2 = 𝑡0.10/2 = 𝑡0.05 , we look at the row with df = 19. We then look at the column with p =
0.05. The value that satisfies these two criteria is 1.729. This is the reliability factor.
Example
An analyst wants to estimate the return on the Hang Seng Index for the current year using
the following data and assumptions:
 Sample size = 64 stocks from the index
 Mean return for the stocks in the sample for the previous year = 0.12
 Variance = 0.081
It is given that the reliability factor for a 95% confidence interval with unknown population
variance and sample size greater than 64 is 1.96. Assuming that the index return this year
will be the same as it was last year, what is the estimate of the 95% confidence interval for
the index’s return this year?
Solution:
s √0.081
Confidence Interval = ̅
X ± t α/2 = 0.12 ± 1.96 [ ] = 0.12 ± 0.07 = 0.05 to 0.19
√n √64
Instructor’s Note:
A conservative approach to confidence intervals relies on the t-distribution rather than the
normal distribution, and use of the t-distribution will increase the reliability of the
confidence interval.

5.1 Selection of Sample Size

The choice of sample size affects the width of a confidence interval. A larger sample size
decreases the width of a confidence interval and improves the precision with which we can
estimate the population parameter. This is obvious when we consider the confidence
interval relationship, shown below:
s
Confidence Interval = ̅ X ± t α/2
√n
All else being equal, when the sample size (n) is increased, the standard error (s/√𝑛)
decreases and we have a more precise (narrower) confidence interval. Based on this
discussion it might appear that we should use as large a sample size as possible. However,
we must consider the following issues:
 Increasing the sample size may result in sampling from more than one population.
 Increasing the sample size may involve additional expenses that outweigh the value
of additional precision.
6. Resampling
Resampling is a computational tool in which we repeatedly draw samples from the original
observed data sample for the statistical inference of population parameters. Two popular
resampling methods are:
 Bootstrap
 Jackknife
Bootstrap
The bootstrap technique is illustrated in the figure below:
The technique is used when we do not know what the actual population looks like. We
simply have a sample of size n drawn from the population. Since the random sample is a
good representation of the population, we can simulate sampling from the population by

sampling from the observed sample i.e., we treat the randomly drawn sample as if it were
the actual population.
Under this technique, samples are constructed by drawing observations from the large
sample (of size n) one at a time and returning them to the data sample after they have been
chosen. This allows a given observation to be included in a given small sample more than
once. This sampling approach is called sampling with replacement.
If we want to calculate the standard error of the sample mean, we take many resamples and
calculate the mean of each resample. We then construct a sampling distribution with these
resamples. The bootstrap sampling distribution will approximate the true sampling
distribution and can be used to estimate the standard error of the sample mean. Similarly,
the bootstrap technique can also be used to construct confidence intervals for the statistic or
to find other population parameters, such as the median.
Bootstrap is a simple but powerful technique that is particularly useful when no analytical
formula is available to estimate the distribution of estimators.
Jackknife
In the Jackknife technique we start with the original observed data sample. Subsequent
samples are then created by leaving out one observation at a time from the set (and not
replacing it). Thus, for a sample of size n, jackknife usually requires n repetitions. The
Jackknife method is frequently used to reduce the bias of an estimator.
Note that bootstrap differs from jackknife in two ways:
 Bootstrap repeatedly draws samples with full replacement.
 The researcher has to decide how many repetitions are appropriate.
7. Sampling-Related Biases
There are many issues in sampling. Here we discuss four main issues.
7.1 Data-Snooping Bias
Data-snooping is the practice of analyzing the same data again and again, till a pattern that
works is identified.
There are two signs that can warn analysts about the potential existence of data snooping:
• Too much digging/too little confidence: Many different variables were tested, until
significant ones were found. Unfortunately, many researchers do not disclose the
number of variables examined in developing a model.
• No story/no future: Without a reasonable economic rationale or story for why a
variable should work, the variable is unlikely to have predictive power.
The best way to avoid this bias is to test the pattern on out-of-sample data to check if it

holds.
7.2 Sample Selection Bias
When data availability leads to certain assets being excluded from the analysis, the resulting
problem is known as sample selection bias.
Two types of sample selection biases are:
 Survivorship bias: For example, many mutual fund databases provide historical
information about only those funds that currently exist. Since mutual funds usually
shut down after a period of poor performance, this may inflate the average
performance numbers of the database.
 Backfill bias: For example, if a new hedge fund is added to a given index, the fund’s
past performance is also backfilled into the index. Since new funds are usually added
after a period of good performance, this may inflate the index performance.
7.3 Look-Ahead Bias
A test design is subject to look-ahead bias if it uses information that was not available to
market participants at the time the market participants act in the model. For example, an
analyst wants to use the company’s book value per share to construct the P/B variable for
that particular company. Although the market price of a stock is available for all market
participants at the same point in time, fiscal year-end book equity per share might not
become publicly available until sometime in the following quarter.
One way to avoid this bias is to use point-in-time (PIT) data. PIT data is stamped with the
date when it was released. In the above example, PIT data of P/B would be stamped with the
company’s filing or press release date rather than the fiscal quarter end date.
7.4 Time-Period Bias
A test design is subject to time-period bias if it is based on a time period that may make the
results time-period specific. A short time series is likely to give period-specific results that
may not reflect a longer period. If a time series is too long, fundamental structural changes
may have occurred in that time period.

Summary
LO: Compare and contrast probability samples with non-probability samples and
discuss applications of each to an investment problem.
Probability sampling: Every member of the population has an equal chance of being selected.
Therefore, the sample created is representative of the population.
Non-probability sampling: Every member of the population may not have an equal chance of
being selected. This is because sampling depends on factors such as the sampler’s judgement
or the convenience to access data. Therefore, the sample created may not be representative
of the population.
All else equal, the probability sampling method is more accurate and reliable as compared to
the non-probability sampling method.
LO: Explain sampling error.
Sampling error is the difference between a sample statistic and the corresponding
population parameter.
Sampling error of the mean = x̅ − μ
LO: Compare and contrast simple random, stratified random, cluster, convenience,
and judgmental sampling.
Simple random sampling is the process of selecting a sample from a larger population in
such a way that each element of the population has the same probability of being included in
the sample.
In stratified random sampling, the population is divided into subgroups based on one or
more distinguishing characteristics. Samples are then drawn from each subgroup, with
sample size proportional to the size of the subgroup relative to the population. Finally,
samples from each subgroup are pooled together to form a stratified random sample.
Cluster sampling is similar to stratified random sampling as it also requires the population to
be divided into subpopulation groups, called clusters. Each cluster is essentially a mini-
representation of the entire population. Then some random clusters are chosen as a whole
for sampling.
In convenience sampling, the researcher selects members from a population based on how
easy it is to access the member i.e., data is collected from a conveniently available pool of
respondents
In judgmental sampling, the researcher uses his knowledge and professional judgment to
selectively handpick members from the population.
LO: Explain the central limit theorem and its importance.
According to the central limit theorem, if we draw a sample from a population with a mean µ

and a variance σ2, then the sampling distribution of the sample mean:
 will be normally distributed (irrespective of the type of distribution of the original
population).
 will have a mean of µ.
 will have a variance of σ2/n.
LO: Calculate and interpret the standard error of the sample mean.
The standard deviation of the distribution of the sample means is known as the standard
error of the sample mean.
When we know the population standard deviation, the standard error of the sample mean
σ
can be calculated as: σX̅ =
√n
When we do not know the population standard deviation (σ) we can use the sample
s
standard deviation (s) to estimate the standard error of the sample mean sX̅ = n
√
LO: Identify and describe desirable properties of an estimator.

The three desirable properties of an estimator are:
 Unbiasedness: Its expected value is equal to the parameter being estimated.
 Efficiency: It has the lowest variance as compared to other unbiased estimators of the
same parameter.
 Consistency: As sample size increases, the sampling error decreases and the
estimates get closer to the actual value.
LO: Contrast a point estimate and a confidence interval estimate of a population
parameter.
A point estimate is a single value estimate that serves as an approximation for the actual
value of the parameter.
A confidence interval is a range of values, within which the actual value of the parameter will
lie with a given probability.
Confidence interval = Point estimate ± (reliability factor x standard error of point estimate)
LO: Calculate and interpret a confidence interval for a population mean, given a
normal distribution with 1) a known population variance, 2) an unknown population
variance, or 3) an unknown population variance and a large sample size.
Refer to the table below and select t statistic or z statistic as per the scenario.
Small sample Large sample
Sampling from
size(n<30) size(n≥30)
Normal Variance known z z
distribution Variance unknown t t (or z)
Non –normal Variance known NA z
distribution Variance unknown NA t (or z)

Use the following formulae to calculate the confidence interval:

σ
Confidence interval = X̅ ± zα/2
√n
s
Confidence interval = ̅X ± t α/2
√n
LO: Describe the use of resampling (bootstrap, jackknife) to estimate the sampling
distribution of a statistic.
Resampling is a computational tool in which we repeatedly draw samples from the original
observed data sample for the statistical inference of population parameters. Two popular
resampling methods are:
 Bootstrap: Constructs the sampling distribution of an estimator by repeatedly
drawing samples from the original sample with replacement.
 Jackknife: Draws repeated samples while leaving out one observation at a time from
the set, without replacing it.
LO: Describe the issues regarding selection of the appropriate sample size, data
snooping bias, sample selection bias, survivorship bias, look-ahead bias, and time-
period bias.
Increasing the sample size reduces the standard error and gives us narrower confidence
intervals. However, while increasing sample size we must consider two things:
 Cost involved: Compare the cost of getting more data to the potential benefits of
increasing precision.
 Risk of sampling from a different population: In the process of increasing sample size
if we get data from a different population, then the accuracy will not improve.
Biases observed in sampling methods are:
 Data-snooping bias: Analyzing the same data again and again, till a pattern that works
is identified. The best way to avoid this bias is to test the pattern on out-of-sample
data to check if it holds.
 Sample selection bias: Excluding certain assets from the analysis due to unavailability
of data. A type of sample selection bias is the survivorship bias, in which companies
are excluded from analysis because they have gone out of business and data for them
was not easily available.
 Look-ahead bias: Using information that became available at later periods in time in
the analysis.
 Time-period bias: If the selected time period is too short, the results may only hold
for that time period. If the time period is too long, then the results might not consider
major structural changes in the economy.

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LM05 Sampling and Estimation 2023 Level I Notes

LM05 Sampling and Estimation

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3.1 The Central Limit Theorem

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Non –normal Variance known NA z

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6 1.440 1.943 2.447 3.143 3.707

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5.1 Selection of Sample Size

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LO: Identify and describe desirable properties of an estimator.

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Use the following formulae to calculate the confidence interval:

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