Lesson 6 of 14 · All lessons in this module
- Random variables: PMF, PDF and CDF
- Expected value, variance and standard deviationVideo lesson
- Variance and covariance shortcuts, and the law of large numbers
- Discrete distributions: uniform, binomial and Poisson
- Continuous uniform and normal distributions, and simulating random draws
- Log-normal and logistic distributions, and the moments of key distributions
- Integrated cases: reading probabilities and moments from a return model
- Conditional probability and probability trees
- Conditional expected values and variancesVideo lesson
- Covariance from a joint probability function
- Joint, marginal and conditional distributions as information arrives
- Bayes' formula: updating a probability with new informationVideo lesson
- Bayes in practice: diffuse priors, missing inputs and screening tests
- Integrated cases: a tree with model forecasts and a Bayes update
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 6 of 14 · 15 min
Log-normal and logistic distributions, and the moments of key distributions
Prices are modelled as log-normal because they cannot fall below zero and their log returns add up over time; the logistic looks like a normal with fatter tails and drives binary-outcome models.
In short
- Y is log-normal if ln Y is normal. Y is then always positive and skewed to the right, a natural fit for asset prices.
- Log returns add across periods and never imply a negative price. Simple returns do not add, and a normal model of them allows returns below −100%.
- Projected log price: , with log-return standard deviation .
- If , then has mean and variance .
- The logistic distribution has mean μ (its location) and variance (s is the scale). It is symmetric with excess kurtosis 1.2, so its tails are heavier than the normal's.
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