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#1
05-17-2004, 10:49 AM
 eric Member Join Date: Oct 2003 Posts: 311
Where is "Brownian Motion"?

I spent a great deal of time studying on "Brownian Motion" but there is no "Brownian Motion" question found on the two previous exams (Nov and Fall 2004). A lot of people don't like those kind of questions but I like them (because I studied so much on that topic).
#2
05-17-2004, 10:51 AM
 windy Member Join Date: Apr 2004 Posts: 118

I don't see the practical use of Brownian motion. I think normal approximation is enough to covered normal distribution.
#3
05-17-2004, 10:57 AM
 eric Member Join Date: Oct 2003 Posts: 311

Quote:
 Originally Posted by windy I don't see the practical use of Brownian motion. I think normal approximation is enough to covered normal distribution.
I think it is a good topic for course 3 exams. BM can be normal and can also be log-normal. Let's say the stock price (geometic BM) now is 10. What's the prob that it will hit 13 before dropping to 6?
#4
05-17-2004, 11:05 AM
 Browser Member Join Date: Jan 2002 Location: Preston Idaho Posts: 385

Hey I remember that formula eric. It is B/(B+A) Where B is up and A is down. Therefor your questions answer is 4/7. Am I right?????

Just because it is on the syllabus deosn't mean they have to cover it. If they did that then they wouldn't have enough questions left to ask about stuff we have NEVER seen before.
#5
05-17-2004, 12:44 PM
 Sunny Member Join Date: Nov 2003 Posts: 3,940

Quote:
 Originally Posted by Lonesome Kicker Hey I remember that formula eric. It is B/(B+A) Where B is up and A is down. Therefor your questions answer is 4/7. Am I right????? Just because it is on the syllabus deosn't mean they have to cover it. If they did that then they wouldn't have enough questions left to ask about stuff we have NEVER seen before.
That is also the abbreviated form for the Gambler's ruin problem (in the case the probability of loss is 0.5), which the Brownian Motion also alludes to in some cases (in the case there is no drift).

I personally think (Geometric) Brownian Motion can be actually extremely useful irl, such as in the case of modeling the stock prices as eric has mentioned.
#6
05-17-2004, 01:14 PM
 Skantown Member Join Date: May 2003 Location: Orangemen Country Posts: 217

Brownian Motion, especially Geometric Brownian, is the fundamental building block of option pricing theory (remember Black-Scholes from Course II??). It seems like the syllabus should tie Brownian into Black-Scholes somehow. It's a somewhat obscure topic by itself.
#7
05-17-2004, 01:41 PM
 funk1 Member Join Date: Oct 2003 Location: Post Exam C Coma Posts: 1,054

Apparently, it is tied to rabbit and turtle races now .
#8
05-17-2004, 02:07 PM
 eric Member Join Date: Oct 2003 Posts: 311

Quote:
 Originally Posted by Lonesome Kicker Hey I remember that formula eric. It is B/(B+A) Where B is up and A is down. Therefor your questions answer is 4/7. Am I right????? Just because it is on the syllabus deosn't mean they have to cover it. If they did that then they wouldn't have enough questions left to ask about stuff we have NEVER seen before.
Unfortunately, you're not right. This is ONLY true if it's standard Brownian Motion, but not geometic motion. I think if this question was on the exam, a lot of people would get the wrong answer.

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