ABSTRACT
This and the following two chapters are concerned with modeling investment opportunities. is chapter starts by developing models of security prices that will be used in subsequent chapters. e objective of the price model is to portray mathematically and graphically the movement of security prices as time passes. is can be useful for understanding the distribution of possible future prices, and it will also be useful for devising investment strategies, constructing security portfolios, and understanding the pricing of derivative securities. We will look at two di erent ways to model the time path of security prices: the binomial model in discrete time and the continuous time model.
