Starting from page 56 of "The Concepts and Practice of Mathematical Finance" (page attached) I've been able to build a simple tree starting from a given total variance (ie 36).
In a five steps tree the variance at each step is 1/5 of total variance (36/5=7.2) and the variance of the whole sums up again to 36.
My question is: why it does no more hold with 7 time steps (or any number but 5)? I cannot figure out of this. Please take a look to the attached xls and help me understanding where is my mistake.
Thanks a lot to everybody,
Alberto
In a five steps tree the variance at each step is 1/5 of total variance (36/5=7.2) and the variance of the whole sums up again to 36.
My question is: why it does no more hold with 7 time steps (or any number but 5)? I cannot figure out of this. Please take a look to the attached xls and help me understanding where is my mistake.
Thanks a lot to everybody,
Alberto