Categorized | Stock Trading Analysis

Bell Curve in Investing

Bell curve is the commonest form of distribution for a variable. The term is derived from the notion that the graph that shows a normal distribution features a bell-shaped line. Also, this curve is termed a normal distribution. It is not common to refer to the bell curve as a Gaussian distribution, in line with the German physicist and mathematician who made the model popular in the world of science by engaging it in the analysis of astronomical data.

What Bell Curve Represents in the Stock Trading and Investment World

Bell curve is one of the terminologies used in stock trading and investment world. The most probable event is indicated on the top of the bell, or the highest point in the curve. The entire likely occurrences are distributed equally or evenly within the most probable event, and this in turn generates a downward-sloping line on both sides of the peak; it simply means each side of the peak features a downward-sloping line. The Bell curve is a great way to assess stock trading risk in a long term.

In many research areas where analysis of set of data is involved, the bell curve would usually come into play. More importantly as it relates to stock trading and investing, the bell curve is commonly employed in representing or indicating asset class returns as well as their distribution patterns.

The Bell Curve Chart Culled from Investopedia.com

The figure above is a representation of a normal distribution bell curve. The plotting in the middle represents the arithmetic average or mean, which sets out standard deviation to any of the sides. For the bell curve graph shown above, the mean value is 0 (zero), while the standard deviation is 1percent. You can as well call it a standard normal distribution. Although this may not usually be the case in the real world, it is user-friendly for illustrative purposes.

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