The Black-Scholes formula is based on
A)A field of mathematics known as Brownian geometry.
B)An assumption that stock prices are distributed normally.
C)An assumption that continuously-compounded stock returns are distributed normally.
D)A geometric process that allows for both positive and negative stock prices.

Question

Quizplus · Accepted Answer

The Black-Scholes formula is based on the assumption that continuously-compounded stock returns are distributed normally. This is known as the log-normal distribution.

The Black-Scholes Formula Is Based on