The distribution of returns, measured over long intervals, like annual returns, can be approximated by
A) Normal distribution
B) Binomial distribution
C) Lognormal distribution
D) none of the above

Question

Quizplus · Accepted Answer

The lognormal distribution is often used to model returns because it accounts for the fact that returns on an asset cannot be negative and tends to be right-skewed. This is a better fit than the normal distribution, which assumes that there may be negative returns and that returns are symmetrically distributed. The binomial distribution is not appropriate for continuous variable like returns.

The Distribution of Returns, Measured Over Long Intervals, Like Annual