Imagine if you will that you are at a racetrack and you want to keep a log of the position in which the horses in a race finish. Specifically, you want to record whether the horse in the pole position came in first, second, and so on for each race of the day. You will only record ten places. If the horse came in worse than in tenth place, you will record it as a tenth-place finish. If you do this for a number of days, you will have gathered enough data to see the distribution of finishing positions for a horse starting out in the pole position. Now you take your data and plot it on a graph. The horizontal axis represents where the horse finished, with the far left being the worst finishing position (tenth) and the far right being a win. The vertical axis will record how many times the pole position horse finished in the position noted on the horizontal axis. You would begin to see a bell-shaped curve develop.
Under this scenario, there are ten possible finishing positions for each race. We say that there are ten bins in this distribution. What if, rather than using ten bins, we used five? The first bin would be for a first or second-place finish, the second bin for a third-or fourth-place finish, and so on. What would have been the result?
Download Link : Risk Analysis Techniques For Traders