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Quantitative MethodsModule 6 of 11

Simulation Methods

4

Concepts

2

Formulas

1

Decisions

3

Quiz Questions

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Key Concepts

4 concepts covered in this module.

Lognormal Distribution

If ln(X) is normally distributed, X follows a lognormal distribution. Bounded below by 0 — natural for asset prices.

Continuous Compounding

If rcc is normally distributed, then the price relative (1+R) is lognormally distributed.

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Formulas

2 essential formulas for this module.

Lognormal Price

ST = S0 × ercc×T

Where: rcc = continuously compounded return, T = time

CC Return from Prices

rcc = ln(ST / S0)

Where: ln = natural logarithm

Decision Frameworks

1 decision frameworks to guide your analysis.

When to use Monte Carlo vs Bootstrapping?

  • Monte Carlo: when you have a model/distribution to simulate from
  • Bootstrapping: when you want to let historical data speak without distributional assumptions

Mind Map

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Flashcard

Lognormal Distribution

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Answer
If ln(X) is normally distributed, X follows a lognormal distribution. Bounded below by 0 — natural for asset prices.
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