Question

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

Answer 1

+0.25

Explanation:

Calculation to determine the drift of such a process

Using this formula

Drift=(Increases in stock price*50%)- (Decreases in stock price *50%)

Let plug in the formula

Drift = (0.5)(1.25) + (0.5)(-0.75)

Drift =0.625+ (0.375)

Drift = +0.25%

Therefore the drift of such a process is +0.25