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The Pitfalls of Relying on the Central Limit Theorem in Portfolio Return Analysis.
In the world of finance, both individuals and investing professionals alike strive for making sound investment decisions with consideration of risk. Usually this process involves understanding and analysis of portfolio returns. Central to this methodology is the Central Limit Theorem (CLT), a statistical concept widely employed to assess the behavior of financial data. However, beneath its apparent utility lies a series of assumptions that can mislead rather than illuminate. This article delves into why a critical examination of the CLT’s applicability in portfolio return analysis is imperative, shedding light on its limitations and the alternatives that offer a more accurate view of financial reality.
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