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iPhone x case For example, if the S 500 drops 2.92% in a day (doubtless inciting headlines with the word \”crash\” and \”depression\” in them) we can determine the sigma level of this event as three by dividing the percentage drop (2.92%) by the S historic standard deviation (0.973%).The normal distribution assesses the odds of a 3 sigma day like this at 0.135%, which assuming a 252 day trading year predicts a drop this size or greater should occur about once every 3 years of trading.The odds associated with 8 to 10 sigma events are truly mind boggling. The chart below illustrates how often events of various sigma levels should be expected.I disagree. The reasonable conclusion from seeing 5 or higher sigma events in the markets should not be that things are falling apart or that the market is rigged, instead, we should recognize that we are using the wrong probability model.Where the Normal Distribution Works And Where it Doesn\’tGraphically comparing the S 500 returns since 1950 with the matched normal distribution looks like this:The actual returns have a higher central peak and the \”shoulders\” are a bit narrower, but the historic frequency of events occurring within the 3 sigma range isn\’t significantly different from what is predicted by the normal distribution. iPhone x case
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