In Log Normal Distribution.......when calculating probability.. When do we take the value of denominator as.....((n^.5)*sigma) and when it is...(n*sigma)....I am really confused in this concept..!!!!!! In the notes in some questions n has been used and then square root has been done...........and in some other n^2 has been used and then square root has been done.........i just cant get it.....!!! I would really appreciate if someone would please explain this....... Regards and Thanks....
Thanks a lot Sir.....itz been a great help.... i got it now.... its a basic idea that has to be kept in mind while doing the questions....itz all about whether the interest rate is fixed or variable....!!!! Just now i was doing the ques 4.26 which differentiates between the 2 models..... the explanation given in that ques is as follows....... """If the interest rate was constant in all future years, the variance in the accumulation factor would be increased. If the variance is higher, extreme values are more likely, so the probability would be larger."""" Can u please explain this full statement....stating why will the variance be higher in fixed model.....and how will it affect probability..........so that I can understand the concept rather than just mugging up the fact....... Thanks & Regards.....
In the "fixed" model the variance is n²σ² which (if n>1) will be bigger than the "variable" nσ² variance.
