Could anyone help me with this question? Thanks in advance. Which of the following statements regarding the distribution of returns used for asset pricing models is most correct? A) Normal distribution returns are used for asset pricing models because they will only allow the asset price to fall to zero. B) Normal distribution returns are used for asset pricing models because lognormal returns result in spurious results. C) Lognormal distribution returns are used because this will allow for negative returns on the assets. D) Lognormal distribution returns are used for asset pricing models because they will not result in an asset return of less than -100%.
D Lognormal distributions have a lower bound of 0. It is used to measure asset prices because the price cannot fall below 0.
The lognormal distribution comes from believing that the volatility is proportional to the price. Thus, a $2 stock is just as likely to move 5% as a $200 stock, but the $200 stock is much more likely to have a $1 move.