Final answer:
The stock return over very short periods is assumed to follow a normal distribution, which is a continuous distribution characterized by a bell-shaped curve and defined by its mean and standard deviation.
Step-by-step explanation:
The return on a stock over very short periods is indeed typically modeled as having a normal distribution. This is under the key assumption that stock price movements are random and typically distributed in a manner that can be graphically represented by a bell-shaped curve.
In finance and economics, as well as in the fields of psychology, business, and many other disciplines, the normal distribution plays a critical role. For example, the distribution of IQ scores and many types of error measurements in experiments are commonly assumed to follow a normal distribution. However, it is crucial to note that not all real-world phenomena can be perfectly described by a normal distribution.
To further clarify, the normal distribution is a continuous distribution characterized by its bell-shaped curve, where the mean (μ) and standard deviation (σ) define its shape and spread. The standard normal distribution, which is a special case, has a mean of zero and a standard deviation of one, and it is used to convert raw scores into z-scores for statistical analysis.