21. One of the early extensions to the Black-Scholes model was the constant elasticity of...

21. One of the early extensions to the Black-Scholes model was the constant elasticity of variance (CEV) model for equities. The CEV model assumes the following form of stochastic process for the stock price:

where the parameters are defined as usual except that is the CEV parameter.

(a) What parameter value for results in the Black-Scholes model?

(b) As declines, does the riskiness of the stock increase or decrease?

(c) Explain the linkage of this model to the leverage effect.