Reference no: EM133169527

Question - a) Construct a diffusion tree of prices and probabilities for an asset tree using the following information:

Starting Price (period 0) 100

Diffusion rate 4.00%

Probability of a price rise 0.6

Number of periods (from 0 to 7) 8

Steps (after period 0) 7

From the range of outcomes in the diffusion tree answer the following question:

b) What will be the probability of getting a price (a) at the end of the eighth period above 110 and (b) at or below 85?

c) Calculate the expected asset price, return and standard deviation of prices after eight periods.

d) Calculate the expected return of the price series at the end of the eighth period using the natural log return.