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  • Normal Distribution W Ith Zero Mean

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    RAGUL S
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    The document discusses the normal distribution with a zero mean and standard deviations of 1 and 3. It then discusses the central limit theorem and how averages of independent, identically distributed random variables with finite variance become approximately normally distributed as the number of variables increases. However, this can fail if the underlying distributions are "fat-tailed" or no longer independent. A graph compares the normal distribution to the heavier-tailed Cauchy distribution. Finally, it notes that a normal distribution with the same properties as the histogram shown would have an incredibly low probability of a return over 20%.

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    The document discusses the normal distribution with a zero mean and standard deviations of 1 and 3. It then discusses the central limit theorem and how averages of independent, identically distributed random variables with finite variance become approximately normally distributed as the number of variables increases. However, this can fail if the underlying distributions are "fat-tailed" or no longer independent. A graph compares the normal distribution to the heavier-tailed Cauchy distribution. Finally, it notes that a normal distribution with the same properties as the histogram shown would have an incredibly low probability of a return over 20%.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    6 views6 pages

    Normal Distribution W Ith Zero Mean

    Uploaded by

    RAGUL S
    The document discusses the normal distribution with a zero mean and standard deviations of 1 and 3. It then discusses the central limit theorem and how averages of independent, identically distributed random variables with finite variance become approximately normally distributed as the number of variables increases. However, this can fail if the underlying distributions are "fat-tailed" or no longer independent. A graph compares the normal distribution to the heavier-tailed Cauchy distribution. Finally, it notes that a normal distribution with the same properties as the histogram shown would have an incredibly low probability of a return over 20%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 6

    Norm al Distribution w ith Zero Mean

    0.45

    0.4

    0.35

    0.3

    0.25
    Standard Dev. = 3
    f(x)

    Standard Dev. = 1
    0.2

    0.15

    0.1

    0.05

    0
    -15 -10 -5 0 5 10 15
    Return (x)
    Central Limit Theorem
    • Averages of a large number of independent identically
    distributed shocks (whose variance is finite) are approximately
    normally distributed
    • Can fail if the underlying shocks are fat tailed
    • Can fail if the underlying shocks lose their independence
    Norm al Versus Fat Tailed Distributions

    0.45

    0.4

    0.35

    0.3

    0.25
    Normal Distribution
    f(x)

    Cauchy Distribution
    0.2

    0.15

    0.1

    0.05

    0
    -15 -10 -5 0 5 10 15
    Return x
    Outliers
    • Normal distribution with same mean and standard deviation
    as the histogram shown has a probability of a drop greater
    than 20% equal to 3*10^-71

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