When valuing a project using the Black-Scholes option pricing model,R is set equal to the:
A)historical real market rate of return.
B)annually compounded risk-free rate.
C)expected future real market rate of return.
D)continuously compounded risk-free rate.
E)project's CAPM rate of return.

Question

Quizplus · Accepted Answer

The Black-Scholes option pricing model assumes that the risk-free rate is continuously compounded. Therefore, the best choice for R is the continuously compounded risk-free rate, which is option D.

When Valuing a Project Using the Black-Scholes Option Pricing Model,R