When a Stock Price,S,follows Geometric Brownian Motion with Mean Return

question 15

Multiple Choice

When a stock price,S,follows geometric Brownian motion with mean return m and volatility s what is the process follows by X where X = ln S.

• A) dX = m dt + s dz
• B) dX = (m−r) dt + s dz
• C) dX = (m −s2) dt + s dz
• D) dX = (m − s2/2) dt + s dz

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Definitions:

Operating Leverage

The degree to which a firm relies on fixed costs in its operations, affecting its potential income variability.

Financial Leverage

The use of borrowed money to increase the potential return of an investment.

Business Cycle

The natural rise and fall of economic growth that occurs over time, including periods of expansion, peak, contraction, and trough.

Economic Conditions

The state of a country or region's economy, including factors like unemployment, inflation, and GDP growth.