Question

Stock $\mathrm{A}$ and stock $\mathrm{B}$ both follow geometric Brownian motion. Changes in any short interval of time are uncorrelated with each other. Does the value of a portfolio consisting of one of stock A and one of stock B follow geometric Brownian motion? Explain your answer.

   Stock $\mathrm{A}$ and stock $\mathrm{B}$ both follow geometric Brownian motion. Changes in any short interval of time are uncorrelated with each other. Does the value of a portfolio consisting of one of stock A and one of stock B follow geometric Brownian motion? Explain your answer.
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 14, Problem 7 ↓

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Geometric Brownian motion is a mathematical model used to describe the random movement of stock prices over time. It assumes that the logarithmic returns of the stock are normally distributed and that the stock price follows a stochastic differential equation.  Show more…

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Stock $\mathrm{A}$ and stock $\mathrm{B}$ both follow geometric Brownian motion. Changes in any short interval of time are uncorrelated with each other. Does the value of a portfolio consisting of one of stock A and one of stock B follow geometric Brownian motion? Explain your answer.
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