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%.