QUESTIONS 19 THROUGH 32 RELATE TO QUANTITATIVE METHODS

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

Time = 0 Time = 1 Time = 2

S ₀ = 100 S _u = 110 S _uu = 121

S d = 92 S ud,du = 101.20

S _dd = 84.64

The initial value of the stock is $100. The probability of an up move in any given period

is 40% and the probability of a down move in any given period is 60%. Using the

binomial model, the probability that the stock’s price will be $101.20 at the end of two

periods is closest to:

A. 16%.

B. 24%.

C. 48%.