The Normal Distribution Myth
A summary of the SSRN article "The Normal Distribution Myth", which rejects the hypothesis that return distributions are normal.
Most of the current mainstream academic investment theory builds on the assumption that returns follow a normal or elliptical distribution, for example, CAPM, Black-Litterman, and mean-variance.
As explained in Chapter 2 of the Portfolio Construction and Risk Management book, elementary data analysis reveals that this is not the case for real-world investment returns.
However, finance and economics university academics have written many articles and books about these and associated methods. This unfortunately causes many of them to completely ignore the important nuances of reality.
Sometimes, university academics try to justify the old methods using pseudoscientific and vague arguments for the existence of what is called “Aggregational Gaussianity” (AG), which refers to the idea that log-returns approximate a normal distribution as the investment horizon increases.
The AG result should supposedly follow from some undefined central limit theorem (CLT) that should “kick in” at longer horizons.
However, when we perform formal tests for normality with reasonable samples size, the normal distribution null hypothesis is clearly rejected most of the time, see the cover image to this article.
You can read much more about all of the above in The Normal Distribution Myth SSRN article and see how all the computations have been performed in the accompanying Python code.
Applied Quantitative Investment Management course
As recently announced, I will be giving a course that carefully goes through all the details of the Portfolio Construction and Risk Management book.
The course will focus on the perspectives of institutional multi-asset investors. This aligns with my own investment experience and the people that I regularly talk to.
Hence, the course will provide you with highly relevant knowledge for practical investment management.
You can get access to the course by becoming a paid subscriber of the Quantamental Investing publication.
The course will run for 12 weeks from July to September. Once it starts, the yearly subscription price will increase from the current €100.
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See also the expanding collection of paid content that you get access to in addition to the course and the opportunity to chat with me.