So, a Schweser mock states that the returns on the underlying asset follow a normal distribution, whereas CFAI mock PM q46 has marked it as incorrect. Normal or lognormal?
Which question in which schweser mock?
Lognormal is correct according to the CFA textbook.
you think returns can follow a lognormal distribution? as in they can never be less than 0? WHERE CAN I INVEST IN THIS ASSET?
Hahah I never said it was my opinion. Just stating the facts.
I think its in GBM assumptions. Price can go down but not by much or something like that.
From my understanding, the value is lognormal, but returns are normal.
I think theres been a loootttt of misstating in both schweser and cfai over the years (from forum searches)
[… Deleted my previous comment …]
Under the Geometric Brownian Motion assumption, the returns are lognormally distributed.
Here’s an excerpt from the text:
“Geometric Brownian motion implies a lognormal distribution of the return, which implies that the continuously compounded return on the underlying is normally distributed.”
Its in the Geometric Brownian Motion assumptions. Asset price can be argued as following generalized wiener process with drift component and noise. Then use Ito’s lemma and InST/S0 and InST are normally distributed
yes you’re right my apologies
if i still remember, using the ito lemma, you can expand the geometric brownian into its taylor form, and taking the ln should show that it’s normally distributed with a expected value of 0 and standard deviation of sqrt(t)*sigma
its for pricing of options man…think of a call or put…the lowest value to the buyer is $0. It’s very logical once you think of it from that perspective.
yup that makes a lot of sense
CONTINUOUSLY compounded returns are normally distributed.