Suppose That in a Binomial Model, the Stock Moves Up $\mathcal { U } = e ^ { \Sigma \sqrt { h } }$

question 2

Multiple Choice

Suppose that in a binomial model, the stock moves up by a factor $\mathcal { U } = e ^ { \Sigma \sqrt { h } }$ and down by a factor $d = e ^ { - \sigma - \sqrt { h } }$ , where $h _ { c }$ is time in years. Letting $h =$ one month and $u = 1.05$ , what is the annualized volatility $\sigma$ of the stock?

• A) 6.93%
• B) 10.39%
• C) 13.86%
• D) 16.90%

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Definitions:

Standard Deviation

A measure of the amount of variation or dispersion in a set of values.

Confidence Interval

An estimated range of values which is likely to include an unknown population parameter, calculated from a given set of sample data.

Margin of Error

An expression of the amount of random sampling error in a survey's results, indicating a range within which the true value lies at a certain confidence level.

Probability

The extent to which an event is likely to occur, measured by the ratio of the favorable cases to the whole number of cases possible.