The central limit theorem

In the study of probability theory, the central limit theorem (CLT) states that the distribution of sample means approximates a normal distribution (also known as a “bell curve”), as the sample size becomes larger, assuming that all samples are identical in size, and regardless of the population distribution shape.
Said another way, CLT is a statistical theory stating that given a sufficiently large sample size from a population with a finite level of variance, the mean of all samples from the same population will be approximately equal to the mean of the population. Furthermore, all the samples will follow an approximate normal distribution pattern, with all variances being approximately equal to the variance of the population, divided by each sample’s size.

• The central limit theorem (CLT) states that the distribution of sample means approximates a normal distribution as the sample size gets larger.
• Sample sizes equal to or greater than 30 are considered sufficient for the CLT to hold.
• A key aspect of CLT is that the average of the sample means and standard deviations will equal the population mean and standard deviation.
• A sufficiently large sample size can predict the characteristics of a population accurately.

The Central Limit Theorem in Finance
The CLT is useful when examining the returns of an individual stock or broader indices, because analysis is simple, due to the relative ease of generating the necessary financial data. Consequently, investors of all types rely on the CLT to analyze stock returns, construct portfolios, and manage risk