A random walk process consists of the toss of a fair coin at the end of each day. If the outcome is heads stock price increases by 1.25% and if the outcome is tails the stock price decreases by 0.75%. What is the drift of such a process?
A) +1.25%
B) -0.75%
C) +0.25%
D) None of the above

Question

Quizplus · Accepted Answer

The drift of a random walk process is the expected value of the daily return. Assuming an equal probability of heads and tails, the expected daily return is (1.25% + (-0.75%))/2 = 0.25%/day. Therefore, the drift of the process is +0.25%.

A Random Walk Process Consists of the Toss of a Fair