The Black-Scholes model assumes that stock price movements can be described by
A) Geometric moving averages.
B) Arithmetic moving averages.
C) Regression towards the mean.
D) Geometric Brownian motion.
E) Stochastic time lags.

Question

Quizplus · Accepted Answer

The Black-Scholes model assumes that stock price movements follow a geometric Brownian motion process, which reflects a continuous and random walk where the returns are normally distributed. The other options (A, B, C, and E) do not accurately describe the type of process that the Black-Scholes model uses to model stock price movements.

The Black-Scholes Model Assumes That Stock Price Movements Can Be