just a quick question, are the underlying returns distributed normally or lognormally?
I was sure that underlying RETURNS are distributed normally where underlying PRICES are distributed lognormally, but I found some inconsistency between Schweser readings and Schweser questions.
Asset price are lognormal.
So price reltives must also be lognormal Pt/Pt-1 can’t go below zero.
So that’s why we take the natural log Ln(Pt/Pt-1) this is normally distributed.
So if you said returns are normally distributed you’d be incorrect but if you say the log of the returns are normally distributed you’d be correct.
I think you may have missed this nuance from the Schweser books.