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Now suppose that you think the returns distribution is well approximated by a normal distribution. The normal distribution is a two-parameter distribution: mean and variance, therefore, you can estimate those parameters without any complex econometric approach.
1. Plot the histogram again, but this time add a normal density over the histogram to assess how good of an assumption normality is. (Hint: Stata's histogram command has an option to do this automatically.)
2. Compute the Value-at-Risk at the 99% confidence level based on the estimated normal distribution of returns. Remember that the VaR is the maximum loss (or minimum returns in this case) that could occur with probability 1 - , i.e., 1% of the cases.
3. How does the investment limit that you would establish for the trader, in dollars, compare to the limit estimated based on the empirical distribution above?
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