Histogram of stock returns

Financial Analytics in Google Sheets

David Ardia

Professor of Quantitative Methods for Finance

Empirical distribution

Reports the number of times (frequency) past returns were observed within specific intervals
- For example: How many times were past returns greater than or equal to 2% but smaller than 3%?
A histogram can graphically show an empirical probability distribution

1) Divide the range of returns into bins

1) Divide the range of returns into bins

1) Divide the range of returns into bins

1) Divide the range of returns into bins

1) Divide the range of returns into bins

1) Divide the range of returns into bins

1) Divide the range of returns into bins

2) Compute the frequency of past returns for each bin

2) Compute the frequency of past returns for each bin

3) Build the chart

3) Build the chart

3) Build the chart

It is also common to report the relative frequency in a histogram
Defined as the frequency divided by the total number of returns
- Can be interpreted as a probability
- Can be compared with a theoretical model

Financial Analytics in Google Sheets