Consider a stock with value S = 50. Each period the stock moves up or down, independently, in discrete steps of 5. The probability of going up is p = 0.7 and down 1-p= 0.3. What is the expected value and the variance of the value of the stock after 3 period? %3D

Consider a stock with value S = 50. Each period the stock moves up or down, independently, in discrete steps of 5. The probability of going up is p = 0.7 and down 1-p= 0.3. What is the expected value and the variance of the value of the stock after 3 period? %3D

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 5P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

2. Consider a stock with value S = 50. Each period the stock moves up or down,
independently, in discrete steps of 5. The probability of going up is p 0.7 and down
1-p 0.3. What is the expected value and the variance of the value of the stock
after 3 period?

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