1. Consider a stock over a two-day period with current price of 200. The stock price will move up or down 12 units on day one and will move up or down 9 units on day two from its day one price. Thus there are four possible prices on day two: 221, 203, 197, 179 with probabilities 0.3, 0.4, 0.2, 0.1, respectively.
2. 1. Draw the probability tree of the stock price over a two-day period. 2. Find the expected value of the price on day two.