Suppose returns on a stock are lognormally distributed with expected (annualized) mean of of 0.10 and standard deviation of 0.20. What is the expected simple return on the stock for one month?
A) 0.83
B) 1.01
C) 1.08
D) 1.13

Question

Quizplus · Accepted Answer

The expected monthly return can be found using the formula:
E(monthly return) = e^((E(annual return) - 0.5*SD^2)/12) - 1
= e^((0.10 - 0.5*0.20^2)/12) - 1
= e^(0.08333) - 1
= 0.0855 or 8.55%
So, the expected simple return on the stock for one month is 1 + 0.0855 = 1.0855 or 8.55%. Rounded to two decimal places, this is 1.01.

Suppose Returns on a Stock Are Lognormally Distributed with Expected