19. Consider the binomial approximation to a geometric Brownian motion process on a stock's return. The stock
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19. Consider the binomial approximation to a geometric Brownian motion process on a stock's return. The stock has an annualized expected rate of return of 12%, and an annualized volatility of 30%. Suppose our approximation assumes a period of t=0.04 year (=2 weeks); what is the distribution of prices in one period under the binomial model? After 2 periods; after 3 periods? The current price of the stock is $50.
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Answer rating: 100% (QA)
To calculate the distribution of prices in the binomial model we can use the following formulas For a single period t 004 year Up factor u e sqrtt whe... View the full answer
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