Consider a Binomial Tree in Which the Stock Moves Up $u$

Consider a binomial tree in which the stock moves up by a factor $u$ and down by a factor $d$ ,respectively with probabilities $p$ and $1 - p$ .The variance of log-returns per time step is given by the following formula:

A) $p ( 1 - p ) \left[ \ln ( u / d ] ^ { 2 } \right.$
B) $p ( \ln u ) ^ { 2 } + ( 1 - p ) ( \ln d ) ^ { 2 }$
C) $[ p \ln u + ( 1 - p ) \ln d ] ^ { 2 }$
D) $p ( 1 - p ) ( u / d ) ^ { 2 }$

Correct Answer:

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