What does a Confidence Interval provide?

A Confidence Interval provides an estimate of the range of possible values for a parameter. This statistic is particularly useful in the context of investments and finance, as it allows analysts to quantify the uncertainty around an estimated value, such as the mean return of an investment, or the difference in performance between two investment strategies.

The interval is calculated from sample data and gives a range within which the true parameter value is expected to lie, typically with a specified confidence level (for example, 95% or 99%). This means there is a certain likelihood (confidence level) that the true parameter falls within that range, which gives investors and analysts insight into potential volatility and expected outcomes.

Applications of confidence intervals in finance can include estimating returns, measuring the impact of factors influencing stock prices, and making informed decisions based on the estimated impacts of various financial models. Hence, understanding how to interpret confidence intervals is crucial for evaluating and managing investment decisions effectively.