The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.
A) I and II
B) I and III
C) II and II
D) I, II, and IV
E) I, II, III, and IV

Question

Quizplus · Accepted Answer

The risk-free rate and stock price volatility are assumed to be constant, but the option value does not depend on the expected rate of return on the stock. The model also assumes that stock prices will not jump markedly.

The Black-Scholes Formula Assumes That I) the Risk-Free Interest Rate