The Financial Times Guide to Understanding Finance, 2nd Edition

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Stats II: Normality

• Frequencies and histograms
• The normal distribution
• Calculating probabilities
• The standard normal distribution
• The big picture
• Excel section
• Appendix

Have you read the previous chapter? If yes, then you have refreshed your memory with some statistics that provide invaluable help when summarizing financial information. Which means you’re ready for the second step of our crash course in stats. The heart of this chapter focuses on the widely-used (and abused) normal distribution and a very important (and potentially dangerous to your wallet!) application, the prediction of returns.

Frequencies and histograms

In the previous chapter we argued that not much can be learned by staring at 10 years of monthly returns of any ...