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Lognormal-Distribution-Understanding-its-Nature-and-Applications

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Lognormal-Distribution-Understanding-its-Nature-and-Applications

Uploaded by

somdev648
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lognormal Distribution:

Understanding its Nature and


Applications
In this presentation, we'll delve into the lognormal distribution, a powerful
tool for modeling real-world phenomena. We'll explore its key
characteristics, PDF, and essential properties, and demonstrate its
applications through example problems.

by ༆SOMDEV༆
Lognormal Distribution: A Deep Dive
Key Features Applications

Values strictly positive (X > 0) The lognormal distribution finds widespread applications in
Positively skewed distribution various fields, including:

Often models multiplicative growth Financial modeling of asset prices


Modeling biological growth processes
Analyzing income distributions
Probability Density Function (PDF)
The PDF of a lognormal distribution is given by:

f_X(x; mu, sigma) = (1 / (x * sigma * sqrt(2 * pi))) * exp(-(ln(x) - mu)^2 / (2 * sigma^2)), x > 0

Where:

mu: Mean of the natural logarithm of X


sigma: Standard deviation of the natural logarithm of X
ln(x): Natural logarithm of x
Key Properties of Lognormal
Distribution
Mean Variance
E[X] = e^(mu + (sigma^2 / 2)) Var(X) = (e^(sigma^2) - 1) * e^(2
* mu + sigma^2)

Median Mode
Median(X) = e^mu Mode(X) = e^(mu - sigma^2)
Derivation of Lognormal
Distribution
The derivation of the lognormal distribution involves the following steps:

1. Start with Y = ln(X), where Y ~ N(U, sigma^2)


2. Transform back to X = e^Y, making X lognormally distributed
3. Using the Jacobian of the transformation, derive the PDF of X
Real-Life Applications of the
Lognormal Distribution
Stock Prices Income Distribution
Lognormal distribution often Income distributions in many
models stock prices as they populations frequently
cannot be negative and approximate a lognormal
exhibit multiplicative growth. distribution.

Product Lifetimes
The duration of mechanical devices or biological phenomena often
demonstrates lognormal characteristics.
Lognormal Distribution: BSc
Past Year Questions

Question 1
If a random variable X is lognormally distributed with parameters mu = 2
and sigma = 1, find the mean and median of X.

Question 2
Derive the PDF of a lognormal distribution starting from the normal
distribution of ln(X).

Question 3
A company's annual revenue follows a lognormal distribution with mu = 5
and sigma = 1.2. Calculate the variance of the revenue.

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