Confidence Interval

A Confidence Interval is a range of values derived from statistical data that is likely to contain the true value of a parameter with a specified level of certainty. In financial risk management, it is used to define the bounds within which a portfolio's return is expected to fall.

For instance, a 95 percent confidence interval suggests that the portfolio's return will fall within a specific range 95 percent of the time under normal conditions. This helps traders set expectations and define their risk parameters for derivative positions.

When the market moves outside these intervals, it often signals a regime change or a potential crisis. Understanding confidence intervals is essential for interpreting the results of quantitative models and risk assessments.