The distribution of returns, measured over long intervals, like annual returns, is best approximated by the
A)normal distribution.
B)binomial distribution.
C)lognormal distribution.
D)uniform distribution.

Question

Quizplus · Accepted Answer

Empirical evidence shows that long-term returns are better represented by the lognormal distribution, which is skewed to the right and has a fat tail. The normal distribution assumes returns are normally distributed, which is not the case in practice. The binomial distribution assumes two possible outcomes (such as heads or tails in a coin toss), which is not appropriate for financial returns. The uniform distribution assumes all outcomes are equally likely, which is not the case for financial returns.

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