QUESTIONS 19 THROUGH 32 RELATE TO QUANTITATIVE METHODS

23. Assume that a stock’s price over the next two periods is as shown below.

Time = 0

Time = 1

Time = 2

S

0

= 80

S

u

= 88

S

uu

= 96.8

S

d

= 72

S

ud,du

= 79.2

S

dd

= 64.8

The initial value of the stock is $80. The probability of an up move in any given period is 75%

and the probability of a down move in any given period is 25%. Using the binomial model, the

probability that the stock’s price will be $79.20 at the end of two periods is closest to:

A.

18.75%.

B.

37.50%.

C.

56.25%.