Prediction interval
The range around a regression forecast likely to contain the actual outcome. It reflects both the scatter of the data and error in the estimated coefficients, and widens as the input moves away from its sample mean.
Where you will meet it
Prediction interval appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Work out the standard error of estimate and explain what it shows
“A smaller standard error means a tighter fit and narrower prediction intervals.”
- Apply a regression model to produce a forecast
“The point estimate is only half the answer; a prediction interval around it reflects both the scatter of the data and the uncertainty in the estimated coefficients, and it widens as the chosen x moves away from the mean of the sample.”
Practise it
Practise prediction interval until it is automatic: questions that explain every wrong option.
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