In a binomial tree created to value an option on a stock,what is the expected return on the option?
A) Zero
B) The return required by the market
C) The risk-free rate
D) It is impossible to know without more information

Question

Quizplus · Accepted Answer

The expected return on the option on the tree is the risk-free rate.This is an application of risk-neutral valuation.The expected return on all assets in a risk-neutral world is the risk-free rate.

In a Binomial Tree Created to Value an Option on a Stock,what