Why is normal distribution used 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 a normal distribution so important for investments?

The higher the standard deviation, the riskier the investment, as it leads to more uncertainty. Hence, the graphical representation of normal distribution through its mean and standard deviation enables the representation of both returns and risk within a clearly defined range.

Why is the normal distribution not a good model for some financial data?

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 investment returns follow normal distribution?

Stock returns are roughly normal after all and a lot of the benefits of investment theory such as diversification hold true even in a world of less than normal stock returns and fat tails (perhaps even more so).

How do businesses use normal distribution?

The normal distribution has applications in many areas of business administration. In operations management, process variations often are normally distributed. In human resource management, employee performance sometimes is considered to be normally distributed.

How does the return distribution relate to the normal distribution if the return horizon becomes longer?

When the time horizon increases, the central limit law sets in and the distribution of the returns over a long time-horizon (such as a month) tends toward a normal distribution.

Why is the normal distribution not a good model of some financial data chegg?

The standard deviation is too high 1 point.

What are the disadvantages of normal distribution?

One of the disadvantages of using the normal distribution for reliability calculations is the fact that the normal distribution starts at negative infinity. This can result in negative values for some of the results. For example, the Quick Calculation Pad will return a null value (zero) if the result is negative.

Why does a stock return normally distributed?

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.

https://www.youtube.com/watch?v=cIp8SI9HApA