Where is "Brownian Motion"?

[eric]

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).

[windy]

I don't see the practical use of Brownian motion. I think normal approximation is enough to covered normal distribution.

[eric]

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?

[Browser]

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.

[Sunny]

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.

[Skantown]

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.

[funk1]

Apparently, it is tied to rabbit and turtle races now .

[eric]

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.