"quantity"exercise:Distribution of future stock prices

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Questions 1:

If a stock’s continuously compounded return is normally distributed, then the distribution of the future stock price is best described as being:

A 、normal.

B、 a Student’s t.

C、 lognormal.

Questions 2:

A US Treasury bill (T-bill) has 90 days to maturity and a bank discount yield of 3.25%. The effective annual yield (EAY) for the T-bill is closest to:

A 、3.29%.

B、 3.32%.

C 、3.36%.

View answer resolution

【Answer to question 1】C

【analysis】

C is correct. If a stock’s continuously compounded return is normally distributed, then the future stock price is necessarily lognormally distributed. A is incorrect. If a stock’s continuously compounded return is normally distributed, then future stock price is necessarily lognormally distributed. B is incorrect. If a stock’s continuously compounded return is normally distributed, then future stock price is necessarily lognormally distributed.

【Answer to question 2】C

【analysis】

C is correct. The initial price (P0) of the T-bill is calculated as follows:

quantity exercise:Distribution of future stock prices