In a Binomial Tree Created to Value an Option on a Stock,the

question 8

Multiple Choice

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

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Definitions:

Diseconomies of Scale

The phenomenon where production costs per unit increase as a firm's size or output increases beyond a certain point.

U-shaped

A description often used to illustrate how certain economic variables, such as average cost, behave, initially decreasing with increased activity and then increasing.

TVC

Total Variable Cost, which refers to the sum of all costs that vary with the level of output or production, such as raw materials and direct labor costs.

TC

An abbreviation for Total Cost, it quantifies the overall expense incurred in the production of goods or services, encompassing both fixed and variable costs.