Binomial IID Processes

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• Discrete counterpart to standard continuous time model

• Two investments
  • a riskless bond
  • a stock (representing the stock market)

• Two states of the world in each period
  • in one the stock goes up
  • in the other the stock goes down

• For a horizon of n periods there will be 2ⁿ possible sets of one-period outcomes
  • each will have an ending stock value relative
  • stock value-relative in ending state s = W_s