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historical data tells us that the S&P 500 has an average yearly return of 7% and a yearly volatility of 17%. Suppose you were to
historical data tells us that the S&P 500 has an average yearly return of 7% and a yearly volatility of 17%. Suppose you were to implement an N-period binomial model to price options on the S&P500 with a maturity of one year. Propose a choice of the return rates u and d, and the physical probabilities (p,1-p), as to guarantee that returns of the S&P500 in your model have the same expected value and the same standard deviation over 1-year time horizons as implied by the data.
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