Final answer:
A stock’s returns are typically characterized by a normal (Gaussian) distribution, as stock returns tend to exhibit a bell-shaped curve over the long term.
Correct option is A) Gaussian distribution
Step-by-step explanation:
When it comes to characterizing a stock’s returns, typically financial analysts would model returns using the normal distribution or Gaussian distribution. This is because stock returns, over a long term, tend to exhibit a bell-shaped curve which is the hallmark of the normal distribution.
Looking at the examples provided:
- Question 52 suggests that as the distance someone can run increases, fewer people can run this far. This scenario is characteristic of an exponential distribution, where the likelihood of an event decreases exponentially as the variable increases.
- Question 87 relates to conducting a hypothesis test where the exact distribution is mentioned to be the normal distribution.
- The exponential distribution described in the customer service scenario suggests that service times are not equally likely; shorter times are more common than longer ones, indicating an exponential behavior in waiting times (Questions 46-50).
- From these examples and concepts, it is clear that uniform distribution represents events that are equally likely to occur (Question 5.2), while a Poisson distribution is typically used for events occurring independently and at a known rate (4.6 Poisson Distribution).