What Is a Bell Curve?

A bell curve is a common type of distribution. Also known as the normal distribution, the term "bell curve" originates from the fact that the graph used to depict a 澳洲幸运5官方开奖结果体彩网:normal distribution consists of a symmetrical bell-shaped curve. The highest point on the curve, or the top of the bell, represents the most probable event in a series of data (its mean, mode, and median in this case), while all other possible occurrences are symmetrically distributed around the mean, creating a downward-sloping curve o🍌n each side of the peak.

How a Bell Curve Works

The term "bell curve" is used to describe a graphical depiction of a 澳洲幸运5官方开奖结果体彩网:normal probability distribution whose underlying standard deviations fro🎶m thꦿe mean create the curved bell shape.

A standard deviation is a measurement used t🤡o quantify the variability of data dispersion in a set of given values around the mean. The mean, in turn, refers to the average of all data points in the data set or sequence and will be found at the highest point on the bell curve.

Financial analysts and investors often use a normal probability distribution when analyzing the returns of a security or of overall market sensitivity. In finance, standard deviations that depict the returns of a security are known as 澳洲幸运5官方开奖结果体彩网:volatility. 

For example, stocks that display a bell curve are usually blue-chip stocks and ones that have lower volatility and more predictable behavioral patterns. Investors use the normal probability distribution of a stock's past returns to make assumptions regarding expected future returns.

In addition to teachers who use a bell curve when comparing test scores, the b꧒ell curve is often also used in the world of statistics, where it can be widely applied. Bell curves are also sometimes employed in performance management, placing employees who perform their jobs in an average fashion in the normal distribution of the𒆙 graph.

The high performers and the lowest performers are represented on either side with th☂e dropping slope. It can be useful to larger companies when doing perfo🍒rmance reviews or when making managerial decisions. 

Example of a Bell Curve

A bell curve's width is defined by its 澳洲幸运5官方开奖结果体彩网:standard deviation, which is calculated as the level of var𒉰iation of da🌟ta in a sample around the mean. Using the empirical rule, for example, if 100 test scores are collected and used in a normal probability distribution, 68% of those test scores should fall within one standard deviation above or below the mean.

Moving two standard deviations away fꦉrom the mean should include 95% of the 100 test scores collected. Moving three standard deviations away from th🐽e mean should represent 99.7% of the scores (see the figure above).

Test scores that are extreme outliers, such asꦐ a score of 100 or 0, would be considered long-tail data points that consequently lie squarely outside of the three-standard-deviation range.

Bell Curve vs. Non-Normal Distributions

The normal probability distribution assumption doesn’t always hold true in the financial world, however. It is 𝕴feasible for stocks and other securities to sometimes display non-normal distributions that fail to resemble a bell curve. 

Non-normal distributions have fatter tails than a bell curve (normal probability) distribution. A fatter tail skews𝓰 negative signals to investors that there is a g🐽reater probability of negative returns.

Limitations of a Bell Curve 

Grading or assessing performance using a bell curve forces groups of people to be categorized as poor, average, or good. For smaller groups, having to categorize a set number𓃲 of individuals in each category to fit a bell curve will do a disservice to the individuals.

Sometimes, they may all☂ be just average or even good workers or students, but given the need to fit their rating or grades to a bell curve, some individuals are forced into the poor group. In reality, data is not perfectly normal.

Sometimes there is skewness, or a lack of symmetry, between what falls above and below the mean. Other times, there are fat tails (excess kurtosis), making tail e൩vents𝔉 more probable than the normal distribution would predict.

The Bottom Line

A bell curve represents a normal distribution and is commonly used in finaꦍnce and economics to analyze data and assess future performance. Despite its usefulness, however, bell curves have limitation🌠s, as not all data fit a normal distribution.