In the Cox-Ross-Rubinstein (CRR)binomial Model,the Volatility Is Given As $\sigma = 0.2$

question 7

Multiple Choice

In the Cox-Ross-Rubinstein (CRR) binomial model,the volatility is given as $\sigma = 0.2$ .The risk-free rate of interest is 2%.What is the risk-neutral probability of an up move on a binomial tree with a time step of one month?

• A)0.45
• B)0.50
• C)0.55
• D)0.60

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Definitions:

Discounted Payback Period

The time required to recoup the cost of an investment taking the time value of money into account, effectively the period it takes for an investment's cash flows to cover its initial cost.

Cash Inflows

Money coming into a business from various sources, including sales, investment income, and financing activities.

Required Rate

The minimum percentage return that an investor expects to achieve from an investment.

Average Accounting Return

A measure of the profitability of an investment, calculated as the average net income divided by the average book value of the investment.