lognormal-property

Although the Black-Scholes option pricing model makes several assumptions, the most important is the first assumption that stock prices follow a lognormal distribution (and that volatility is constant). Specifically, the model assumes that log RETURNS (aka, continuously compounded returns) are...

Learning objectives: Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return. Compute the realized return and historical volatility of a stock. Describe the assumptions underlying the Black-Scholes-Merton option pricing model...