LESSON 5

Confidence Interval

1
Introduction

Statistical inference is the process by which we

acquire information about populations from
samples.
There are two types of inference:
 Estimation
 Hypotheses testing

2
 Estimator’s Characteristics
Selecting the right sample statistic to estimate a
parameter value depends on the characteristics of the
statistic.
Estimator’s desirable characteristics:
Unbiasedness: An unbiased estimator is one whose
expected value is equal to the parameter it estimates.
Consistency: An unbiased estimator is said to be
consistent if the difference between the estimator and
the parameter grows smaller as the sample size
increases.
Relative efficiency: For two unbiased estimators, the one
with a smaller variance is said to be relatively efficient.
3
Estimating the Population Mean when the
Population Variance is Known
How is an interval estimator produced from a
sampling distribution?
 A sample of size n is drawn from the population, and
its mean x is calculated.
 By the central limit theorem x is normally distributed
(or approximately normally distributed.), thus…

4
Estimating the Population Mean when the
Population Variance is Known

x 
Z
 n

We have established before that

 
P(   z  2  x    z 2 )  1 
n n
5
The Confidence Interval for  (  is known)
This leads to the following equivalent
statement

 
P( x  z  2    x  z 2 )  1 
n n

The confidence interval

6
 Interpreting the Confidence Interval for 

 of
11 ––  of all
all the
the values
values of
of x obtained
obtained inin repeated
repeated
sampling from
sampling from aa given
given distribution,
distribution, construct
construct an
an interval
interval
   
x  z 2 n , x  z 2 n 
 
that includes
that includes (covers)
(covers) the
the expected
expected value
value of
of the
the
population.
population.
7
The Confidence Interval for  (  is known)
Four commonly used confidence levels

Confidence
Confidence
level
level  
 z
0.90
0.90 0.10
0.10 0.05
0.05 1.645
1.645
0.95
0.95 0.05
0.05 0.025
0.025 1.96
1.96
0.98
0.98 0.02
0.02 0.01
0.01 2.33
2.33
0.99
0.99 0.01
0.01 0.005
0.005 2.575
2.575

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 The Width of the Confidence Interval

The width of the confidence interval is

affected by
• the population standard deviation ()
• the confidence level (1-)
• the sample size (n).

9
Selecting the Sample size
We can control the width of the confidence interval by
changing the sample size.
Thus, we determine the interval width first, and derive the
required sample size.
The phrase “estimate the mean to within W units”,
translates to an interval estimate of the form

xx  ww
10
 Selecting the Sample size
The required sample size to estimate the mean is
22
zz22
nn  
 ww 
Click Here to see how the formula is developed.

11
 Inference About a Population Mean When the
Population Standard Deviation Is Unknown

Recall that when  is known we use the following

statistic to estimate and test a population mean
x
z
 n

When  is unknown, we use its point estimator s,

and the z-statistic is replaced then by the t-statistic
12
 The t - Statistic

x  x 
Z t
 n s n

When the sampled population is normally distributed,

the t statistic is Student t distributed.

13
 The t - Statistic Using the t-table

x 
t
s n

The t distribution is mound-shaped, The “degrees of freedom”,

and symmetrical around zero. (a function of the sample size)
determine how spread the
d.f. = v2 distribution is (compared to the
d.f. = v1 normal distribution)
v1 < v2
14
0
Estimating  when  is unknown

• Confidence interval estimator of  when  is

unknown

ss
xx  tt 22 dd..ff.. nn11
nn

15
Estimating  when  is unknown
• Example
– An investor is trying to estimate the return on
investment in companies that won quality awards
last year.
– A random sample of 83 such companies is selected,
and the return on investment is calculated had he
invested in them.
– Construct a 95% confidence interval for the mean
return.
16
Estimating  when  is unknown
• Solution (solving by hand)
– The problem objective is to describe the population
of annual returns from buying shares of quality
award-winners.
– The data are interval. x  15.02 s 2  68.98
– Solving by hand s  68.98  8.31
• From the Xm12-02 we determine
s 8.31
x  t 2, n 1  15.02  1.990  13.19,16.85
n 83
t.025,82 t.025,80 17
Inference About a Population Proportion

• When the population consists of nominal data,

the only inference we can make is about the
proportion of occurrence of a certain value.
• The parameter p was used before to calculate
these probabilities under the binomial distribution.

18
 Inference About a Population Proportion
• Statistic and sampling distribution
– the statistic used when making inference about p is:
mm
pˆpˆ  where
where
nn
mmthe the number
number of of successes
successes..
nnsample
sample size
size..
– Under certain conditions, [np > 5 and n(1-p) > 5],
p̂ is approximately normally distributed, with
 = p and 2 = p(1 - p)/n. 19
Testing and Estimating the Proportion
• Test statistic for p
p̂p̂pp
ZZ
pp((11pp))//nn
where np
where np55 and and nn((11pp))55

• Interval estimator for p (1- confidence level)

p̂p̂zz/ 2/ 2 p̂p̂((11p̂p̂))//nn
provided nnp̂p̂55 and
provided and nn((11p̂p̂))55
20