The Lognormal Distribution

A random variable Y follows a lognormal distribution if its natural logarithm, lnY, is normally distributed.

Lognormal distribution is bounded below by 0 and it is skewed to the right. A usefully accurate description of the distribution of asset prices.

[Practice Problems] In contrast to normal distributions, lognormal distributions:

A.  are skewed to the left.

B.  have outcomes that cannot be negative.

C.  are more suitable for describing asset returns than asset prices.

[Solutions] B

By definition, lognormal random variables cannot have negative values.