Simulate once known the distribution

Mauricio Bedoya
javierma36@gmail.com
August 2014
Lets say that we know that the data (X) of an experiment (nance or not) are distributed with
mean () and standard deviation (). Mathematically, we can say that
X
dis
Normal[, ] (1)
If you want to simulate again the experiment, you can proceed like

X = + Z (2)
with Z
iid
Normal[0, 1]. To prove that equation 2 is correct and characterize

X data, just take
the expectation and variance of

X. For the expectation:
E[

X] = E[ + Z]
= E[] + E[ Z]
= + E[Z]
= .
(3)
and are constant and the expectation of Z is zero. For the Variance, we get:
V [

X] = E[X
2
] (E[X])
2
= E[( + Z)
2
]
2
= E[
2
+ 2 Z +
2
Z
2
]
2
=
2
+ 2 E[Z] +
2
E[Z
2
]
2
=
2
E[Z
2
]
=
2
.
(4)
Try to nd the variance of Z
1
1
Hint: IfE[Z] = 0; then: V [Z] = E[Z
2
] (E[Z])
2
. Operating you get: V [Z] = E[Z
2
] = 1.
1
Then we can conclude that equation 2 is correct. But How do we get it ?. The answer is very
simple: STANDARDIZATION.
In statistics when we standardize a data sample, we subtract the mean and divide by the
standard deviation. This allow us to say that
If X
dis
Normal[, ], then: Z
dis
Normal[0, 1], with
Z =
X

(5)
Operating in equation 5, we can get equation 2.
2