A more appropriate model of stock price behavior

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Stock A and stock B both follow geometric Brownian motion. Changes in any short interval of time are uncorrelated with each other. Does the value of a portfolio consisting of one of stock A and one of stock B follow geometric Brownian motion? Explain your answer.

Question:-

The process for the stock price in equation is

where μ and σ are constant. Explain carefully the difference between this model and each of the following:

Why is the model in below given equation a more appropriate model of stock price behavior than any of these three alternatives?

1450_Formula 2.jpg

Reference no: EM131237401

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