Q6 Consider 2 stocks under the binomial tree model. Assume that stock 1 and stock 2 are independent and both of them have 50% chance to go up and down. The binomial tree parameters for stock 1 and 2 are ui = 1.2, d = 0.82, and u2 = 1.175, d2 = 0.84, respectively. We start with Vo = 100 dollars to invest and we use half of the money to buy stock 1 and the remaining money to buy stock 2. After 1 period, we rebalance our portfolio so that each stock still worth 50% in our portfolio. Denote by V2 the value of the portfolio after 2 periods. Compute E[log(V2/V)]. Comment: In practice this is called "volatility puming". It's possible to combine 2 losing stocks and generate positive profit on average. Q6 Consider 2 stocks under the binomial tree model. Assume that stock 1 and stock 2 are independent and both of them have 50% chance to go up and down. The binomial tree parameters for stock 1 and 2 are ui = 1.2, d = 0.82, and u2 = 1.175, d2 = 0.84, respectively. We start with Vo = 100 dollars to invest and we use half of the money to buy stock 1 and the remaining money to buy stock 2. After 1 period, we rebalance our portfolio so that each stock still worth 50% in our portfolio. Denote by V2 the value of the portfolio after 2 periods. Compute E[log(V2/V)]. Comment: In practice this is called "volatility puming". It's possible to combine 2 losing stocks and generate positive profit on average