Question

Explain why a financial analyst might need to create a histogram. Indicate the necessity of histogram in comparing the stock performances.

Answer 1

A financial analyst may need to create histograms to showcase the distribution that weekly or monthly returns has for a typical stock or the market as a whole. It helps in understanding whether the returns are normally distributed or if there is a skew in the distribution of returns.

Through histogram based analysis, one can compare the stock returns to see if there is a skew in the returns of the stock or if there is a skew for certain stocks. For risk management, a normally distributed stock returns is preferable as that allows one to have certain degree of certainty and predictability in measuring risks and then hedging it suitably.