Selection bias

Distortion that arises when the sample is not representative of the population it is meant to describe. In hedge fund databases managers choose whether to report, and poor performers tend not to.

Where you will meet it

Selection bias appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain why hedge fund index returns as reported can be biased
  CFA Level I · Alternative Investments

  “Selection bias means managers choose whether to report at all.”

• Discuss real estate investment indexes: how they are built and the biases they may contain
  CFA Level II · Alternative Investments

  “Transaction-based indexes use actual sales, either repeat-sales methods or hedonic regressions that control for property characteristics; they respond faster but suffer sample selection bias, because the properties that sell may not represent the market, and they become noisy when volumes are thin.”

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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