Thanks for answering my question on the binomial method. Would you mind
giving me an idea on a related one?
Problem 31 of fall 1995 exam reads
Assume a stock price can either increase by 25% or decrease by 20%
over a month period. Calculate
the increase and decrease in stock price over a year period, if the
standard deviation of continuously
compounded annual returns on the stock were to remain the same.
First, I found the "if ..." statement hard to understand. Second, if a
stock can go up and down in fixed percentages in a month, then it should
have 13 possible values after a year. So there is not a single increase or
decrease after a year.
What is my misunderstanding here?
There are a few more similar questions in past 5B exams.
Again thanks for help.
Kevin