CFA Practice Question

CFA Practice Question

Suppose you are studying a database of stock prices, and you discover a trading rule that, if it had been followed during the period of the database, would generate investment returns far greater than the broad market index. Your discovery is:
A. a classic example of data bootstrapping.
B. a classic example of data mining.
C. a classic example of data snooping.
Explanation: Data mining refers to the practice described above - a database that is scoured for patterns, however lacking in theoretical justification, and sometimes based on a search of a large number of variables. The problems with data mining are primarily that a) hindsight is 20/20 (perfect vision), so the discovery is not necessarily meaningful if all know about it, and b) when there is a lack of theoretical basis, the patterns should not be expected to repeat in the future (when one could presumably take advantage of the vaunted trading rule discovered).

User Contributed Comments 6

User Comment
ostrich Data mining is the process of sorting through large amounts of data and picking out relevant information.

Date snooping: In the process of data mining, huge numbers of hypotheses about a single data set can be tested in a very short time, by exhaustively searching for combinations of variables that might show a correlation.
chenchow clearly data mining, not data snooping.
dimanyc Great! my 'study book's footnote says: some researchers use the term "data-snooping" interchangebly with "data-mining" :)
colinn CFAI page 442 only has a single footnote on "data snooping", which reads as dimanyc put it. I believe this is the only reference in the curriculum, so I don't think this distinction is important. Still, I think "data mining" is the more proper term.
manju79 Data Bootstrapping is a computer based method of assigning accuracy to sample estimates
moneyguy Perhaps snooping refers to data mining with a specific pattern in mind that you are trying to verify exists? I think data mining is a more objective activity, where snooping is looking for something specific.
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