Lesson 6 of 14 · All lessons in this module
  1. Random variables: PMF, PDF and CDF
  2. Expected value, variance and standard deviationVideo lesson
  3. Variance and covariance shortcuts, and the law of large numbers
  4. Discrete distributions: uniform, binomial and Poisson
  5. Continuous uniform and normal distributions, and simulating random draws
  6. Log-normal and logistic distributions, and the moments of key distributions
  7. Integrated cases: reading probabilities and moments from a return model
  8. Conditional probability and probability trees
  9. Conditional expected values and variancesVideo lesson
  10. Covariance from a joint probability function
  11. Joint, marginal and conditional distributions as information arrives
  12. Bayes' formula: updating a probability with new informationVideo lesson
  13. Bayes in practice: diffuse priors, missing inputs and screening tests
  14. 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 ln⁡(P1/P0)\ln(P_1/P_0) 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: ln⁡ST=ln⁡S0+(μ−σ2/2)T\ln S_T = \ln S_0 + (\mu - \sigma^2/2)T, with log-return standard deviation σT\sigma\sqrt{T}.
  • If X∼N(μ,σ2)X \sim N(\mu, \sigma^2), then Y=eXY = e^X has mean eμ+σ2/2e^{\mu + \sigma^2/2} and variance (eσ2−1)e2μ+σ2(e^{\sigma^2} - 1)e^{2\mu + \sigma^2}.
  • The logistic distribution has mean μ (its location) and variance s2π2/3s^2\pi^2/3 (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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