Most asset price models derive from log-prices being a random walk. And, in reality, statistical evaluations on real data reveal that stock indices (for example) are close to being log-normal, i.e. the the logarithm of price is roughly equal to a sum of regular factors, with the amount indexed by time.Originally Posted by ;
This kind model of is also developed into a continuous-time model of the markets. By way of example, the Nobel Prize winning option pricing formula is based on such a model.
Getting back to the spreadsheet, the advantage modelled pliers or doubles its price in every time-step, i.e. the log_2 of the price shift is Bernoulli or the flip of a fair coin.
Thus , a balanced portfolio will increase its value by 50 percent if price goes up and it'll lose 25% if price goes down.