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Over very short periods, the return on a stock is normally distributed, key assumptions.

A. Abnormal distribution
B. Uniform distribution
C. Non-normal distribution
D. Normal distribution

User Chros
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1 Answer

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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.

User Colin Nichols
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