Which of the following describes the way that the parameters in a binomial tree are chosen?
A) The expected return during each time step is the risk-free rate
B) The standard deviation of the return in each time step is, for small time steps, almost exactly equal to the volatility per annum times the square root of the length on the time step in years
C) The tree recombines
D) All of the above

Question

Quizplus · Accepted Answer

All of the given options describe the way that the parameters in a binomial tree are chosen. The expected return during each time step is assumed to be the risk-free rate, the standard deviation of the return in each time step is almost exactly equal to the volatility per annum times the square root of the length of the time step in years, and a recombining tree is used to accurately model the price of the underlying asset.

Which of the Following Describes the Way That the Parameters