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Question:
A researcher needs to choose a probability distribution for the price of an asset that is quite volatile in order to simulate returns outcomes. She has a program that will generate random variables from any of a variety of distributions. The most appropriate distribution for her to select to generate the asset price distribution is a:
A
lognormal distribution.
explanation
The lognormal distribution is most appropriate for modeling asset prices because the values cannot be less than zero and are not bounded on the upside. A binomial distribution allows only two possible outcomes over a period.
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