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207
7.In a binomial tree created to value an option on a stock, the expected return on stock is
A.Zero
B.The return required by the market
C.The risk-free rate
D.It is impossible to know without more information
A.Zero
B.The return required by the market
C.The risk-free rate
D.It is impossible to know without more information
Answer: C
The expected return on the stock on the tree is the risk-free rate. This is an application of risk-neutral valuation.
The expected return on the stock on the tree is the risk-free rate. This is an application of risk-neutral valuation.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015