The assumption is that the stock returns are normally distributed, and because the future stock price is a log function of return, given by log(St/S0), the stock price variable has a lognormal distribution. Do note that even if the returns are not normally distributed, their sum/ mean will be normally distributed and so the stock price always has a lognormal distribution.
lognormal at 05:52
THANKS
This is very useful, but how do we know if the stock follows the pattern lognormally?
The assumption is that the stock returns are normally distributed, and because the future stock price is a log function of return, given by log(St/S0), the stock price variable has a lognormal distribution. Do note that even if the returns are not normally distributed, their sum/ mean will be normally distributed and so the stock price always has a lognormal distribution.