Investments, tenth edition

   Normal and Lognormal Returns 

 As we mentioned earlier, one of the important properties of the normal distribution is its 

stability, in the sense that adding up normally distributed returns results in a return that 

also is normally distributed. But this property does not extend to  multiplying   normally 

distributed returns; yet this is what we need to do to find returns over longer horizons. For 

example, even if two returns,  r  

1

  and  r  

2

 , are normal, the two-period return will compound 

bod61671_ch05_117-167.indd   153

bod61671_ch05_117-167.indd   153

6/18/13   8:04 PM

6/18/13   8:04 PM

Final PDF to printer

---

154

P A R T   I I

  Portfolio Theory and Practice