Point estimate

A single figure offered as the best estimate of an unknown quantity. On its own it says nothing about how uncertain that estimate is, which is what an interval is for.

Where you will meet it

Point estimate appears in 4 learning outcomes on the CFA syllabus. A few of them:

• Set out what the Gordon growth model takes for granted and how sensitive its output is to inputs
  CFA Level I · Equity Investments

  “Sensitivity is therefore extreme precisely where the inputs are least certain, which is why the model is used for stable mature payers and why a sensitivity table matters more than a point estimate.”

• Explain Monte Carlo simulation and what it is used for
  CFA Level I · Quantitative Methods

  “Monte Carlo simulation generates many random draws from assumed distributions for the uncertain inputs of a model, computes the outcome for each, and uses the resulting distribution of outcomes to answer questions a single point estimate cannot.”

• Explain how sensitivity analysis is used in FCFF and FCFE valuation
  CFA Level II · Equities

  “The trap is presenting a single point estimate as precise when a plausible change in one input shifts value by a large fraction.”

• Apply a regression model to produce a forecast
  CFA Level I · Quantitative Methods

  “The point estimate is only half the answer; a prediction interval around it reflects both the scatter of the data and the uncertainty in the estimated coefficients, and it widens as the chosen x moves away from the mean of the sample.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary