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Hi Stuart,
Thanks for the message. In a way my doubts relate to the fact that the SD is
related to a normal distribution of outcomes but if you look at the picture
historically in a number of markets the distribution is somewhat skewed. The
normal distribution says that the probability of a large event occurring is
only 0.5% within 3SD's of the mean. The only problem is that if you look at a
number of markets they display a definite "fat tailed" rather than normal
distribution over a very long time period. I understand that markets which
display these characteristics include:DJIA; yen/dollar; US TBonds.
Given this scenario the probability of a large event occurring outside 3SD's
is not 0.5% but maybe several percentage points (2-3%). What I am saying here
is what common sense observation tells us: the assumptions on which linear
statistics are based are just that- assumptions and the probablity of getting
caught out is in fact far higher than it appears from a simple reading of the
product of linear statistical analysis.
These "anomalies" have been rationalised as part of a long memory which some
have tried to explain via chaos theory (which I dont think they have done and
which I dont understand anyway).
My point here is that the real risks of some standard strategies are in fact
somewhat higher than people may think, but being a novice , I will stand to be
corrected on this.
Thanks
Bob Jones
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