Page 43 - FINAL CFA I SLIDES JUNE 2019 DAY 3
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Session Unit 3:
LOS 10.g: Construct a binomial tree to describe
stock price movement, p.220 10. Common Probability Distributions
A binomial model can be applied to stock price movements –due to their typical bi (up and down movements).
With an initial stock price S = 50, u = 1.01, d = 1/1.01, and Prob(U) = 0.6, we can calculate the possible stock prices after two
periods as:
Since a stock price of 50 can result from either ud or du moves,
p of a stock price of 50 after two periods (the middle value) is 2 × (0.6)(0.4) = 48%.
