Stare carefully at these charts
>Yeah, so?
The first chart gives the daily returns for GE stock over the past eight years or so.
The middle gives a set of daily returns obtained by randomly selecting from the actual daily GE returns (over the same 8 years).
The last gives a set of daily returns obtained by randomly selecting from a Normal distribution of returns that has the same
Mean and Standard Deviation as the GE returns (over those 8 years).
>Yeah, so?
Don't you see the difference?
>No! They're all funny looking!
The actual returns have wild variations in returns, reaching to over 8%, both positive and negative.
>But so does the middle chart!
Exactly! Aaah, but that last chart doesn't. Indeed, the returns selected from the Normal distribution are ... uh, tranquil in comparison.
>Tranquil? Is that a technical term?
The point is that actual returns can vary wildly. If you replace actual returns by some mathematical proxy ...
>Like a normal distribution of returns?
Yes. If you replace actual returns you don't get that wild variation.
