Which of the following statements about the Black-Scholes Model (BSM) is most likely true?

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BlackTom AI · Accepted Answer

The information provided for this question is limited to a single purported option and an empty list of answer choices. 
Because there are no other options presented to evaluate, I cannot perform a full comparative analysis across all alternatives. 
Nonetheless, I can discuss the core concept referenced by the given option and why it aligns with the Black-Scholes framework.

Option D states: 'The BSM assumes that the stock price of the underlying stock follows a log-normal distribution.' 
Reasoning: In the Black-Scholes model, the underlying assumption is that the logarithm of the stock price follows a Brownian motion with drift, which implies that the stock price itself is log-normally distributed at any future time, given the current price and time to maturity. This is a foundational element of BSM, leading to closed-form solutions for European option prices.

Why other options (if they were provided) might be incorrect: if an option claimed, for example, that stock prices are normally distributed rather than log-normally, that would be inconsistent with the model’s derivation and would misstate the distributional assumption. If an option suggested that volatility is constant, that would reflect a mischaracterization in some contexts, since the BSM assumes constant volatility as part of its standard specification. If an option claimed the model ignores dividends, that would be true for the non-dividend-adjusted version, but would still require precise framing; misstatements about dividends could lead to errors in pricing.

In summary, given the standard formulation of the Black-Scholes model, the statement that the stock price follows a log-normal distribution is a correct description of its core assumption, even though the full analysis would require evaluating all alternative statements to confirm why they are incorrect. If you provide the full set of answer options, I can compare each one directly and explain why D is the most accurate relative to the others.

Which of the following statements about the Black-Scholes Model (BSM) is most likely true?

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