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Normal Distribution in Finance Analysis

The document discusses the Normal distribution, which is characterized by its mean and standard deviation, and is commonly used in statistics for continuous observations. It also mentions the Capital Asset Pricing Model, which assumes that portfolio returns are normally distributed, providing an example of a portfolio with a 14% annual return and a 33% standard deviation. Additionally, it poses questions regarding the percentage of years the portfolio loses money and the cut-off for the highest 10% of annual returns.

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6 views3 pages

Normal Distribution in Finance Analysis

The document discusses the Normal distribution, which is characterized by its mean and standard deviation, and is commonly used in statistics for continuous observations. It also mentions the Capital Asset Pricing Model, which assumes that portfolio returns are normally distributed, providing an example of a portfolio with a 14% annual return and a 33% standard deviation. Additionally, it poses questions regarding the percentage of years the portfolio loses money and the cut-off for the highest 10% of annual returns.

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ranjitmajumdar69
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© All Rights Reserved
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com
4D8BTJOP6C
NORMAL DISTRIBUTION

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Normal distribution
The Normal (or Gaussian) distribution reperesents the 'typical' shape of
the data for continuous observations.
It has two parameters; a mean and a standard deviation. Skewness and
kurtosis are both zero.
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Proprietary content.
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is meant All Rights
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by ranjitmajumdar@[Link] only. prohibited
Sharing or publishing the contents in part or full is liable for legal action.
Normal distribution
The Capital Asset Pricing Model is a financial model that assumes returns
on a portfolio are normally distributed. Suppose a portfolio has an annual
return of 14% (i.e. an average gain of 14%) with a standard deviation of
33%. A return of 0% means that the value of the portfolio does not
change, a negative return means that the portfolio loses money, and a
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positive return means that the portfolio gains money.

1. What percentage of years does this portfolio lose money?


2. What is the cut-off for the highest 10% of annual returns with
this portfolio?

Proprietary content.
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is meant All Rights
for personal useReserved. Unauthorized use or distribution
by ranjitmajumdar@[Link] only. prohibited
Sharing or publishing the contents in part or full is liable for legal action.

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