Could you help giving me explanations on this quant finance problem? Which of the following statement about the one-step binomial tree-model are correct ? Select all correct options. A. The stock's expected return does not play any role for the arbitrage-free pricing of an option written on the stock. B. Arbitrage-free prices of European stock options can be computed as expected values of the discounted payoff of the option of maturity by using the risk-neutral probability. C. The seller of a European stock option can perfectly hedge herself against the risk of paying the payoff to the holder of the option at maturity by implementing a hedging strategy which perfectly replicates the payoff at maturity by trading the underlying stock.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Could you help giving me explanations on this quant finance problem?
Which of the following statement about the one-step binomial tree-model are correct ?
Select all correct options.
A. The stock's expected return does not play any role for the arbitrage-free pricing of an option written on the stock.
B. Arbitrage-free prices of European stock options can be computed as expected values of the discounted payoff of the option of maturity by using the risk-neutral probability.
C. The seller of a European stock option can perfectly hedge herself against the risk of paying the payoff to the holder of the option at maturity by implementing a hedging strategy which perfectly replicates the payoff at maturity by trading the underlying stock.
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