3) Log-Normal Distribution

Question 1

What is Geometric Brownian Motion

Answer 1

Question 1

Using the GBM model for share prices, what is S(t) equal to

Answer 1

Question 2

What are the strengths and weaknesses of the Geometric Brownian Motion model for share prices

Answer 2

Strengths: Captures properties like independent increments, making it useful for modeling share prices.
Weaknesses:
* The observed volatility σ in real markets is not constant in time
* There are often large non-normal fluctuations in the price which this model does not account for