C
   
   Central Limit Theorem
   















 

C

Central Limit Theorem

The proposition that the distribution of a sum of independent, random variables that are not themselves normally distributed will approach a normal distribution if the number of observations in the sum is large enough. This theorem has been misused by advocates of certain option strategies by applying it to truncated return distributions. The sum of these truncated returns will require more time than any investor can count on to approach normality. Of even greater import, the truncation of extreme values will have a lasting effect on very high or very negative return possibilities. See also Binomial Model (diagram).

Glossary * C