Supervised learning

What it means

Machine learning that fits a model to examples with known outcomes — labelled data — so it can predict the outcome for new cases.

The exam angle

Classifying borrowers as likely to default or not is supervised; it needs past borrowers whose outcome is known.

Where it appears in the syllabus

• Quantitative MethodsCFA Level I · exam weight 11–14% · Returns and benchmarks, time value, distributions, portfolio maths, regression.
• Quantitative MethodsCFA Level II · exam weight 5–10% · Multiple regression, misspecification, time series, machine learning.

Related terms

• Coefficient of determinationThe fraction of the dependent variable’s variation explained by the regression.
• Linear regressionFitting a straight line through data by minimising the sum of squared residuals, to explain a dependent variable by…
• OverfittingA model that fits the noise in its training data as well as the signal, so it performs well in-sample and poorly on…
• Unsupervised learningMachine learning that finds structure in data without a target variable, for example by grouping similar observations…
• AlphaReturn in excess of what the asset’s risk exposures would predict.
• AnnuityA series of equal cash flows at equal intervals.