CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns
An analyst standardizes a normally distributed return by subtracting its mean and dividing by its standard deviation. The resulting standard normal random variable is most accurately described as having:
The standardized variable has a mean of 0 and a variance of 1. Subtracting the mean centers the distribution at zero, and dividing by the standard deviation rescales the spread so that variance and standard deviation both equal one.
- Aa mean of 0 and a variance of 1Correct
- Ba mean of 1 and a variance of 0
- Ca mean of 0 and a variance equal to the original variance
Explanation
Subtracting the mean centers the variable at 0, and dividing by the standard deviation scales the variance to 1. The other options reverse these values or retain the original variance.
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