Question: Problem 7.6 In this problem, we assume that the dynamics of a stock are given by Samuelsons geometric Brownian motion model, and we assume that

Problem 7.6 In this problem, we assume that the dynamics of a stock are given by Samuelson’s geometric Brownian motion model, and we assume that the rate of growth μ and the volatility

σ are known.

1. Use formula (7.15) to derive the distribution of the raw returns RRt over a one-month period Δt.

2. Compare with the distribution derived from (7.17) given by a blind application of Euler’s scheme. Comment.

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