Simulations, Estimation & Inference Flashcards
(18 cards)
What is a probability distribution?
A function that describes the likelihood of all possible outcomes for a random variable.
What is a discrete uniform distribution?
A distribution where all outcomes have equal probability.
What is a binomial distribution?
A discrete distribution for a fixed number of trials, each with two outcomes (success/failure).
What is the key property of a normal distribution?
It is symmetric around the mean and fully described by its mean and variance.
What is a z-score in a normal distribution?
The number of standard deviations a value is from the mean.
What does the empirical rule state for normal distributions?
68% of data is within 1 SD, 95% within 2 SDs, 99% within 3 SDs.
What is a lognormal distribution used for?
Modeling asset prices that cannot be negative.
What is a Monte Carlo simulation?
A technique that uses random sampling to estimate the probability of different outcomes.
What is a shortfall risk?
The probability that a portfolio return falls below a target threshold.
What is a point estimate?
A single value estimate of a population parameter based on sample data.
What is the standard error of the sample mean?
The standard deviation of the sample mean’s distribution.
What does the central limit theorem state?
Sample means from large samples are approximately normally distributed.
What is a confidence interval?
A range of values that likely contains the true population parameter.
What is a degree of freedom in t-distributions?
Equal to sample size minus one; affects the shape of the t-distribution.
When is the t-distribution used?
When estimating the mean of a normally distributed population with an unknown variance and small sample size.
What is the difference between a parameter and a statistic?
A parameter describes a population; a statistic describes a sample.
What is sampling error?
The difference between a sample statistic and the actual population parameter.
Why is standard error smaller with larger samples?
Because the average of more observations tends to be closer to the population mean.
