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(Solution) - Assume that the return Rt of a stock has the

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Assume that the return Rt of a stock has the following log-normal distribution for fixed t:
log (Rt) ~ N(?, ?2).
Suppose we let the density of log(Rt) be denoted by f(Rt) and hypothesize that ? = .17. We further estimate the variance as ?2 = .09.
(a) Find a function ?(Rt) such that under the density, ?(Rt)f(Rt), Rt has a mean equal to the risk-free rate r = .05.
(b) Find a ?(Rt) such that Rt has mean zero.
(c) Under which probability is it ?easier? to calculate

(d) Is the variance different under theseprobabilities?


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This question was answered on: Jul 11, 2017

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