Risk
Normal distribution
Also called Bell curve or Gaussian
The symmetric bell-shaped curve that much of finance assumes returns follow.
How it works
Its convenience is that mean and standard deviation describe it completely, which makes portfolio maths tractable.
Real return distributions are skewed and have fat tails: more extreme outcomes than the curve allows, and more of them on the downside.
Related terms
- Standard deviationA statistical measure of how far values typically sit from their average.
- Fat tailsThe tendency of extreme market moves to happen far more often than standard statistics predict.
- SkewnessWhether a return distribution leans towards large gains or large losses.
- Value at riskAn estimate of the most you would expect to lose over a period, at a stated confidence level.
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