More likely to have normal distribution?

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BuddFoxx

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Portfolio of equities and equity futures or portfolio of bonds with interest rate options?
 
when does any portfolio with options have a normal distribution?
 
usually never. but neither do equity portfolios.
 
Options and bonds behave differently at different points in their lifespan. Their distribution is very non-normal and there are several parts in the curriculum that affirm that standard deviation, Sharpe, analytical Var and others aren’t appropriate for bonds and options - I think there may be questions on mocks about that as well.
CFAI seems to like to believe that equities have a normal distribution. I think it’s hard to build that case, but if that’s about a question it’s probably a better bet to have equities as “more normal” than bonds and options.
 
the way the q was worded though the answer was clear because the options were included in 2 answers and options pose problems when using analytical var
 
Portfolio of equities and equity futures - these assets have their returns distributed symmetrically, whereas options - one sided. No one has normal distribution. However, for Anal. VAR it should be equities+futures. No doubt.
 
prophets wrote:
when does any portfolio with options have a normal distribution?
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I think purchasing call options has a normal distribution because all you are doing is paying the premium….equity index futures have a non normal distribution because it is similar to using leverage and there can be dramatic down swings and up swings in the equity market…futures enhance the vol, which leads to non normal dist?
 
No, options never have normal distribution - look at the payoff diagram - this is their return distribution. Leverage exposes you to a wider variation in returns - and symmetry is not destroyed by the action.
 
-1, then i guess the correct choice was equity index futures..
 
+1. CFAI assumes equities are normal and options are not. Just learn and regurgitate this.
 
yeah… CFAI loves talking about how normal distribution is inapprop for bonds - immediate red flag. put and call option payoffs are definitely not symetrical, and you shouldn’t think of futures as more highly levered than options
 
I don’t remember the wording of this question at all except that two of the choices had options in them, which definitely do not have normal distributions, so the answer must be the third choice.
 
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