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Central limit theorem

FRM Handbook Ch 2: Fundamentals of Probability (Distribution of Averages)

Book: Financial Risk Manager Handbook Plus Test Bank
Author: Philippe Jorion
ISBN: 978-0-470-90401-5

The second half of Chapter 2 is where probability theory connects to daily risk work. Jorion finishes with limit distributions, especially the central limit theorem (CLT), and shows how it justifies normal approximations in VaR backtesting. This section is shorter than the first post on Chapter 2, but it might be more useful on the job.

Is the Normal Distribution Good Enough for Finance?

Chapter 16 is a short but important one. It asks a question that every quant should think about deeply: is the normal distribution actually a good model for financial returns? The answer is “mostly yes, but catastrophically no.” And that “catastrophically no” part has wiped out entire firms.

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