Last week, Jacob Perlman discussed the difference in mid price that you will see whether you use a geometric mean or an arithmetic mean. Since this is a complex subject, he will look to revisit why these are two different measures and what expected values can be derived from the calculations.
Today, Jacob joins Tom Sosnoff and Tony Battista as the guys go over how values will changed depending on the type of calculation used. Jacob explains that a normal distribution is based on an additive calculation. Thus, something that is half as likely to occur should only be worth half as much and we see this in our returns.
However, when looking at the price of an underlying, we use a log-normal distribution that is based on a multiplicative calculation. This means that there is the same chance that the price will be double as it will be halved. Check out the segment to learn the other differences between using an additive or a multiplicative calculation of expected values!