Consider a Binomial Tree in Which the Stock Moves Up $2 i$

question 7

Multiple Choice

Consider a binomial tree in which the stock moves up by a factor $2 i$ and down by a factor $d$ , respectively with probabilities $p$ and $1 - p$ . The variance of log-returns per time step is given by the following formula:

• A) \(p ( 1 - p ) [ \ln ( u d ) ] ^ { 2 }\)
• B) \(p ( \ln u ) ^ { 2 } + ( 1 - p ) ( \ln d ) ^ { 2 }\)
• C) \([ p \ln u + ( 1 - p ) \ln d ] ^ { 2 }\)
• D) \(p ( 1 - p ) ( u / d ) ^ { 2 }\)

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