In a binomial tree created to value an option on a stock, what is the expected return on the option?
A. Zero
B. The return required by the market
C. The risk-free rate
D. It is impossible to know without more information
C
The expected return on the option on the tree is the risk-free rate. This is an application of risk-neutral valuation. The expected return on all assets in a risk-neutral world is the risk-free rate.
Business
You might also like to view...
Hearth & Home, a store which sells household products, has announced a one-week sale on its new carpet line. This is an example of ________
A) promotional pricing B) seasonal pricing C) by-product pricing D) product bundle pricing E) time-based pricing
Business
Bar charts can display data either horizontally or vertically
Indicate whether the statement is true or false
Business