Z-score
An observation restated as the number of standard deviations it sits above or below the mean. It converts any normal variable to the standard normal, so a single table of probabilities serves all.
Where you will meet it
Z-score appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Use the normal distribution to work out probabilities
“A z-score restates any observation as the number of standard deviations it sits from the mean, z = (x - mean) / standard deviation, which converts any normal distribution to the standard normal so one table serves all.”
- Explain the process for judging how good a company's financial reports are
“Screening models such as the Beneish M-score for manipulation and the Altman Z-score for bankruptcy risk help rank companies.”
See also
Practise it
Practise z-score until it is automatic: questions that explain every wrong option.
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