Lognormal distribution for returns ?

CFA Level I Quant
#1

Hi all ,

I was studying porb.distribution , where I came across the lognormal distribution and I have a doubt if the lognormal distribution is better than the common normal distribution even for calculation of the Prob. of returns and value of returns ?

Its clear to me that for asset pricing why lognormals are better , but what about returns ?

Regards,

HedgeFudge

#2

Because the returns are assumed to be continuosly compounded and follows a normal distribution, and thus multiplicative.

#3

If prices follow a lognormal distribution, then (continuously compounded) returns follow a normal distribution, and vice-versa.