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%.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)+2.0%

Question

Quizplus · Accepted Answer

The drift of a random walk process is the expected value of the percentage change in the stock price. Since the coin is fair, the probability of a head is 0.5 and the probability of a tail is 0.5. Therefore, the expected percentage change in the stock price is:

(0.5 * 1.25%) + (0.5 * -0.75%) = 0.25%

So the drift of the process is +0.25%.

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