Frequently Asked Questions In Quantitative Finance

Chapter 2: FAQs 33

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

-1000-450

(^1006501200175023002850340039504500505056006150670072507800835089009450)
10000
Figure 2-2:Probabilities in a simple coin-tossing experiment: one
thousand tosses.
so a standard deviation of
√
605 / 54 ≈ 1 .097. After one
thousand tosses your expected profit is
1000 ×
5
6
≈ 833. 3
and your standard deviation is
√
1000 ×
605
54
≈ 34. 7
See how the standard deviation has grown much less
than the expectation. That’s because of the square-
root rule.
In finance we often assume that equity returns are nor-
mally distributed. We could argue that this ought to be