When the population mean and standard deviation are known what distribution is used?


You are estimating the population mean, mu, not the sample mean, x bar.

Population Standard Deviation Known

If the population standard deviation, sigma is known, then the mean has a normal (Z) distribution.

The maximum error of the estimate is given by the formula for E shown

When the population mean and standard deviation are known what distribution is used?
. The Z here is the z-score obtained from the normal table, or the bottom of the t-table as explained in the introduction to estimation. The z-score is a factor of the level of confidence, so you may get in the habit of writing it next to the level of confidence.

Once you have computed E, I suggest you save it to the memory on your calculator. On the TI-82, a good choice would be the letter E. The reason for this is that the limits for the confidence interval are now found by subtracting and adding the maximum error of the estimate from/to the sample mean.

When the population mean and standard deviation are known what distribution is used?

Student's t Distribution

When the population standard deviation is unknown, the mean has a Student's t distribution. The Student's t distribution was created by William T. Gosset, an Irish brewery worker. The brewery wouldn't allow him to publish his work under his name, so he used the pseudonym "Student".

The Student's t distribution is very similar to the standard normal distribution.

  • It is symmetric about its mean
  • It has a mean of zero
  • It has a standard deviation and variance greater than 1.
  • There are actually many t distributions, one for each degree of freedom
  • As the sample size increases, the t distribution approaches the normal distribution.
  • It is bell shaped.
  • The t-scores can be negative or positive, but the probabilities are always positive.

Degrees of Freedom

A degree of freedom occurs for every data value which is allowed to vary once a statistic has been fixed. For a single mean, there are n-1 degrees of freedom. This value will change depending on the statistic being used.

Population Standard Deviation Unknown

If the population standard deviation, sigma is unknown, then the mean has a student's t (t) distribution and the sample standard deviation is used instead of the population standard deviation.

The maximum error of the estimate is given by the formula for E shown

When the population mean and standard deviation are known what distribution is used?
. The t here is the t-score obtained from the Student's t table. The t-score is a factor of the level of confidence and the sample size.

Once you have computed E, I suggest you save it to the memory on your calculator. On the TI-82, a good choice would be the letter E. The reason for this is that the limits for the confidence interval are now found by subtracting and adding the maximum error of the estimate from/to the sample mean.

When the population mean and standard deviation are known what distribution is used?

Notice the formula is the same as for a population mean when the population standard deviation is known. The only thing that has changed is the formula for the maximum error of the estimate.


Table of Contents

What Is the Central Limit Theorem (CLT)?

In probability theory, the central limit theorem (CLT) states that the distribution of a sample variable approximates a normal distribution (i.e., a “bell curve”) as the sample size becomes larger, assuming that all samples are identical in size, and regardless of the population's actual distribution shape.

Put another way, CLT is a statistical premise that, given a sufficiently large sample size from a population with a finite level of variance, the mean of all sampled variables from the same population will be approximately equal to the mean of the whole population. Furthermore, these samples approximate a normal distribution, with their variances being approximately equal to the variance of the population as the sample size gets larger, according to the law of large numbers.

Although this concept was first developed by Abraham de Moivre in 1733, it was not formalized until 1930, when noted Hungarian mathematician George Pólya dubbed it the central limit theorem.

Key Takeaways

  • The central limit theorem (CLT) states that the distribution of sample means approximates a normal distribution as the sample size gets larger, regardless of the population's distribution.
  • Sample sizes equal to or greater than 30 are often considered sufficient for the CLT to hold.
  • A key aspect of CLT is that the average of the sample means and standard deviations will equal the population mean and standard deviation.
  • A sufficiently large sample size can predict the characteristics of a population more accurately.
  • CLT is useful in finance when analyzing a large collection of securities to estimate portfolio distributions and traits for returns, risk, and correlation.

Central Limit Theorem

Understanding the Central Limit Theorem (CLT)

According to the central limit theorem, the mean of a sample of data will be closer to the mean of the overall population in question, as the sample size increases, notwithstanding the actual distribution of the data. In other words, the data is accurate whether the distribution is normal or aberrant.

As a general rule, sample sizes of around 30-50 are deemed sufficient for the CLT to hold, meaning that the distribution of the sample means is fairly normally distributed. Therefore, the more samples one takes, the more the graphed results take the shape of a normal distribution. Note, however, that the central limit theorem will still be approximated in many cases for much smaller sample sizes, such as n=8 or n=5.

The central limit theorem is often used in conjunction with the law of large numbers, which states that the average of the sample means and standard deviations will come closer to equaling the population mean and standard deviation as the sample size grows, which is extremely useful in accurately predicting the characteristics of populations.

Investopedia / Sabrina Jiang

Key Components of the Central Limit Theorem

The central limit theorem is comprised of several key characteristics. These characteristics largely revolve around samples, sample sizes, and the population of data.

  1. Sampling is successive. This means some sample units are common with sample units selected on previous occasions.
  2. Sampling is random. All samples must be selected at random so that they have the same statistical possibility of being selected.
  3. Samples should be independent. The selections or results from one sample should have no bearing on future samples or other sample results.
  4. Samples should be limited. It's often cited that a sample should be no more than 10% of a population if sampling is done without replacement. In general, larger population sizes warrant the use of larger sample sizes.
  5. Sample size is increasing. The central limit theorem is relevant as more samples are selected.

The Central Limit Theorem in Finance

The CLT is useful when examining the returns of an individual stock or broader indices, because the analysis is simple, due to the relative ease of generating the necessary financial data. Consequently, investors of all types rely on the CLT to analyze stock returns, construct portfolios, and manage risk.

Say, for example, an investor wishes to analyze the overall return for a stock index that comprises 1,000 equities. In this scenario, that investor may simply study a random sample of stocks to cultivate estimated returns of the total index. To be safe, at least 30-50 randomly selected stocks across various sectors should be sampled for the central limit theorem to hold. Furthermore, previously selected stocks must be swapped out with different names to help eliminate bias.

Why Is the Central Limit Theorem Useful?

The central limit theorem is useful when analyzing large data sets because it allows one to assume that the sampling distribution of the mean will be normally-distributed in most cases. This allows for easier statistical analysis and inference. For example, investors can use central limit theorem to aggregate individual security performance data and generate distribution of sample means that represent a larger population distribution for security returns over a period of time.

Why Is the Central Limit Theorem's Minimize Sample Size 30?

A sample size of 30 is fairly common across statistics. A sample size of 30 often increases the confidence interval of your population data set enough to warrant assertions against your findings. The higher your sample size, the more likely the sample will be representative of your population set.

What Is the Formula for Central Limit Theorem?

The central limit theorem doesn't have its own formula, but it relies on sample mean and standard deviation. As sample means are gathered from the population, standard deviation is used to distribute the data across a probability distribution curve.

When the population mean and standard deviation are known what distribution is used for the analysis of the sample?

A one sample mean test is used when the population is known to be normally distributed and when the population standard deviation ( ) is known.

When the population standard deviation is known what is the appropriate distribution?

You must use the t-distribution table when working problems when the population standard deviation (σ) is not known and the sample size is small (n<30). General Correct Rule: If σ is not known, then using t-distribution is correct. If σ is known, then using the normal distribution is correct.

What distribution uses mean and standard deviation?

The t-distribution forms a bell curve when plotted on a graph. It can be described mathematically using the mean and the standard deviation.

What distribution is used for population mean?

The statistic used to estimate the mean of a population, μ, is the sample mean, . If X has a distribution with mean μ, and standard deviation σ, and is approximately normally distributed or n is large, then is approximately normally distributed with mean μ and standard error ..