Which of the Following Is Assumed by the Black-Scholes-Merton Model

question 20

Multiple Choice

Which of the following is assumed by the Black-Scholes-Merton model?

• A) The return from the stock in a short period of time is lognormal
• B) The stock price at a future time is lognormal
• C) The stock price at a future time is normal
• D) None of the above

---

Definitions:

Effective Rate

The real rate of interest earned or paid on an investment or loan in a specified period, considering compounding.

Monthly Compounded

Refers to the process of adding interest to the principal sum of a loan or deposit, recalculated on a monthly basis. This is a repeat of Compounded Monthly with a new definition focusing on recalculating interest increase.

Compounded Monthly

Compounded monthly refers to the process where the interest earned on an investment is added to the principal sum each month, causing the principal amount to grow at an increasing rate.

Effective Rate

The actual interest rate an individual pays or earns on a loan or investment, taking into account the effects of compounding.