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##### Subject 3. The Central Limit Theorem
The central limit theorem states that, given a distribution with a mean μ and variance σ2, the sampling distribution of the mean x-bar approaches a normal distribution with a mean (μ) and a variance σ2/N as N, the sample size, increases.

The amazing and counter-intuitive thing about the central limit theorem is that no matter the shape of the original distribution, x-bar approaches a normal distribution.

• If the original variable X has a normal distribution, then x-bar will be normal regardless of the sample size.
• If the original variable X does not have a normal distribution, then x-bar will be normal only if N ≥ 30. This is called a distribution-free result. This means that no matter what distribution X has, it will still be normal for sufficiently large n.

Keep in mind that N is the sample size for each mean and not the number of samples. Remember that in a sampling distribution the number of samples is assumed to be infinite. The sample size is the number of scores in each sample; it is the number of scores that goes into the computation of each mean.

Two things should be noted about the effect of increasing N:

• The distributions become more and more normal.
• The spread of the distributions decreases.

Based on the central limit theorem, when the sample size is large, you can:

• use the sample mean to infer the population mean.
• construct confidence intervals for the population mean based on the normal distribution.

Note that the central limit theorem does not prescribe that the underlying population must be normally distributed. Therefore, the central limit theorem can be applied to a population with any probability distribution.

Learning Outcome Statements

e. explain the central limit theorem and its importance;

CFA® 2020 Level I Curriculum, 2020, Volume 1, Reading 10

User Comment
jayj001 SAMPLE SIZE = no. of observations in each sample

e.g. 100 samples with 5 observations in each

NOT normal distribution as N < 30
Bududeen it depends if the distribution itself is not normal...if the distribution is normal , then the sample size does not affect the normality of the distribution
so even with a sample size of 5, if the distribution is normal then the distribution follows a normal dist.
GouldenOne What is variable X?
sgossett86 Basically we're navigating from initial statistic theory to how to take our own imperfect data and make standard probability distributions so we can standardize and make inferences comparatively as an analyst. 