Question: Consider a world in which some stock, S, can either go up by 25% or down by 20% in one year and no other outcomes

Consider a world in which some stock, S, can either go up by 25% or down

by 20% in one year and no other outcomes are possible. The continuously

compunded risk-free interest, r, is 5.5% and the current price of the stock,

S0, is $100.

(1) At what continuous rate would the stock price have to grow to end up

at the expected value?

(2) At what continuous rate would the call price have to grow to end up at

the expected value?

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