Which of the Following Describes the Way That the Parameters

question 14

Multiple Choice

Which of the following describes the way that the parameters in a binomial tree are chosen?

• A) The expected return during each time step is the risk-free rate
• B) The standard deviation of the return in each time step is, for small time steps, almost exactly equal to the volatility per annum times the square root of the length of the time step in years
• C) The tree recombines
• D) All of the above

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