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The Skinny on Options: Abstract Applications

Random Shock Mathematics

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In today’s Skinny, we continue inside of our attempts to better understand Geometric Brownian Motion. Last week, we learned the mathematics behind the positive drift in the markets, and today, we try to wrap our heads around the second component to our returns: random shocks. What we see is that the random shocks that hit the market, and thus cause our returns to be anything other than the positive drift, are normally distributed, with an expected value set equal to that positive drift.

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