Sampling error

The difference between a sample statistic and the population parameter it estimates, arising purely from which observations happened to be drawn. It shrinks as the sample grows; bias does not.

Where you will meet it

Sampling error appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Contrast ways of sampling and explain sampling error
  CFA Level I · Quantitative Methods

  “Sampling error is the difference between a sample statistic and the population parameter it estimates, and it shrinks with sample size.”

• Explain how a Monte Carlo simulation of forward rates works and where it is applied
  CFA Level II · Fixed Income

  “More paths reduce sampling error but do not fix a biased model.”

• Work out a forecast of the dependent variable from a fitted regression and given values of the explanatory variable, and explain what it means
  CFA Level II · Quantitative Methods

  “Two sources of uncertainty surround the forecast: the error term itself and the sampling error in the coefficients, so the interval widens for inputs far from their sample means.”

• Weigh full replication against stratified sampling and optimisation as ways to build an index-tracking equity portfolio
  CFA Level III · Portfolio Management Pathway

  “The trap is assuming replication is always best; with many illiquid constituents its trading costs can outweigh sampling error.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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