When Valuing Options Using True Probabilities,the Discount Rate Is Computed

question 20

Multiple Choice

When valuing options using true probabilities,the discount rate is computed as follows:

• A) Once using the risk-free rate
• B) At the final period
• C) For each node
• D) For each path

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Definitions:

Risk-Free Return

The theoretical return of an investment with zero risk, often represented by the yield of government bonds like U.S. Treasury bonds.

Betas

A metric that assesses the systematic risk or volatility faced by a security or portfolio in contrast to the entire market.

Sharpe Measure

A ratio used to evaluate the risk-adjusted performance of an investment, considering both the return and the volatility of the investment.

Risk-Free Return

The theoretical return on investment with no risk of financial loss, typically associated with government bonds.