Estimates are simply that.
Volatility is not a %, but a ratio.
Stocks do not have "risk free" interest rates.
The mean rate of return on a stock is estimated at 20% while the volatility is 40%: The risk free interest rate is 5%:
(a) What is the mean for the log price relative?
(b) Construct the O?nal stock prices for a 10 period one year tree.
(c) Construct the statistical probabilities for these stock prices
(d) Construct the associated risk neutral probabilities.
Please help I cannot figure this out no matter how much I try.
