Are daily returns normally distributed?

“Distributions of daily and monthly stock returns are rather symmetric about their means, but the tails are fatter (i.e., there are more outliers) than would be expected with normal distributions.

What if data does not follow normal distribution?

Many practitioners suggest that if your data are not normal, you should do a nonparametric version of the test, which does not assume normality. But more important, if the test you are running is not sensitive to normality, you may still run it even if the data are not normal.

Why stock return distribution is not a normal curve?

As long as the growth factor used is assumed to be normally distributed (as we assume with the rate of return), then the lognormal distribution makes sense. Normal distribution cannot be used to model stock prices because it has a negative side, and stock prices cannot fall below zero.

When can we assume data is normally distributed?

In general, it is said that Central Limit Theorem “kicks in” at an N of about 30. In other words, as long as the sample is based on 30 or more observations, the sampling distribution of the mean can be safely assumed to be normal.

Do stocks follow a normal distribution?

While the returns for stocks usually have a normal distribution, the stock price itself is often log-normally distributed. This is because extreme moves become less likely as the stock’s price approaches zero. Cheap stocks, also known as penny stocks, exhibit few large moves and become stagnant.

Why is normal distribution important in finance?

Normal distributions help to figure out the financial trends and relationships. For comparison of financial products, assessing risks involved, forecasting financial outcomes, predicting a return on investment, estimating the cost, and demand of other things, these trends and relationships can be utilized.

Why is normal distribution not good?

Give a reason why a normal distribution, with this mean and standard deviation, would not give a good approximation to the distribution of marks. My answer: Since the standard deviation is quite large (=15.2), the normal curve will disperse wildly. Hence, it is not a good approximation.

Do stock prices follow a normal distribution?

While the returns for stocks usually have a normal distribution, the stock price itself is often log-normally distributed. This is because extreme moves become less likely as the stock’s price approaches zero. For example, a 10-cent price change corresponds to a hefty 5 percent if the stock is only $2. …