Ellipses in Statistics and Finance
In statistics, a bivariate random vector (X, Y) is jointly elliptically distributed if its iso-density contours — loci of equal values of the density function — are ellipses. The concept extends to an arbitrary number of elements of the random vector, in which case in general the iso-density contours are ellipsoids. A special case is the multivariate normal distribution. The elliptical distributions are important in finance because if rates of return on assets are jointly elliptically distributed then all portfolios can be characterized completely by their mean and variance — that is, any two portfolios with identical mean and variance of portfolio return have identical distributions of portfolio return.
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