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- Thread starter Maxim Rastorguev
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- Tags binomial-tree

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Yes, David the formula is ok. I succesfully checked it all by construction trees through replicating cash flows of options via borrowing and buying spot stock (didnt use risk neutral probabilities at all). All the results were totally in correspondence with Hull.

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Thank you! Right

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Similarly, the standard deviation of your series is about 13.4% and--this is always interesting to me--we can see that the geometric average of -0.91% is, in fact, less than zero by 1/2 the variance: 0% - 13.4%^2/2 ~= -0.91%. Put another way, volatility erodes returns. Thanks,

053119-cagr-vs-arith

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Interesting! of course I knew the geometric was less than arithmetic but have not thought of this special case when it is in fact a loss while the arithmetic says it is status quo. May be it is even possible to construct a case with arithmetic gain on the back of actual loss. Very misleading basically.

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