The probability distribution for a portfolio's returns can be approximated by the familiar bell-shaped curve known as a(n) _________.
A) normal distribution
B) expected return vector
C) covariance matrix
D) correlation coefficient

Question

Quizplus · Accepted Answer

The normal distribution, also known as the Gaussian distribution, is commonly used to model probability distributions for financial portfolios. It is characterized by a bell-shaped curve and is parameterized by the mean and standard deviation of the distribution. The normal distribution is widely used in finance because of its mathematical tractability and because many variables in finance, such as stock returns, tend to be normally distributed or close to it. Other choices, such as the expected return vector, covariance matrix, and correlation coefficient, are important concepts in finance but do not directly relate to the shape of the probability distribution for a portfolio's returns.

The Probability Distribution for a Portfolio's Returns Can Be Approximated