Probability

Normal Distribution

Also known as: Gaussian

The symmetric bell-shaped distribution that arises from summing many independent contributions.

Fully described by mean and variance. About 68% of mass within one standard deviation, 95% within two, 99.7% within three.

It appears everywhere because of the central limit theorem: sums of many independent finite-variance contributions tend to it regardless of their own shape.

Sums of independent normals are normal, which makes it uniquely tractable.

The trap in finance. Returns are not normal - they have fat tails and negative skew. Using normality for tail risk understates crash probability by orders of magnitude, which is where the "we saw multiple 20-sigma moves" complaints come from.

Related terms

Practise this

Put it into practice

Knowing the definition is not the same as spotting where it applies under time pressure. Work the question bank free.

Start practising free

Browse the full quant interview glossary