Question

Help your classmates understand the width of a confidence interval. Also, explain how this type of statistics help businesses? Use your own words and provide your own examples to help your classmates understand.

Answer 1

First of all, the confidence interval tells gives possible range around the estimate. So many time we are unable to obtain exact estimation. That's why we try to estimate the parameter in terms of range.

The width of the Confidence interval tells us the length of the confidence interval. Shorter the width is a good approximation of parameter. But the width of the confidence interval depends upon the level of significance or in terms of confidence coefficient. The confidence interval generally take 95% or 99% probabilities.

This type of statistics is very useful in business. By the idea of the Confidence interval, a businessman can make their own policy. On the basis of observed data, he can estimate the price of something in the near future in a range.

Let us consider an example: Suppose it is given that a 99% confidence interval, stock XYZ's return will fall between -2% and +6% over the next year. In layman's terms, a person is 99% confident that the returns of holding XYZ stock over the next year will fall between -2% and 6%.On the basis of that information, a businessman can decide whether they should invest money or not to purchase XYZ stock. This information will help them in making a decision.