A random walk process for a single stock consists of the toss of a fair coin at the end of each day. If the outcome is heads, the stock price increases by 1.25 percent. If the outcome is tails, the stock price decreases by 0.75 percent. What is the drift of such a process?
A)+1.25 percent
B)−0.75 percent
C)+0.25 percent
D)+2 percent

Question

Quizplus · Accepted Answer

The drift of a random walk process is the expected value of the change in stock price. In this case, the expected change in stock price is:
(0.5)(1.25 percent) + (0.5)(-0.75 percent) = 0.25 percent

Therefore, the drift of the process is +0.25 percent. Choice C is the correct answer.

A Random Walk Process for a Single Stock Consists of the Toss