If the Stock Price Follows a Random Walk Successive Price

question 17

Multiple Choice

If the stock price follows a random walk successive price changes are statistically independent. If σ2 is the variance of daily price change, and there are t days until expiration, the variance of the cumulative price changes is:

• A) σ2
• B) (σ2) * (t)
• C) (σ2)/t
• D) none of the above

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Definitions:

Perpetually

Continuing forever or for an indefinite period without anticipated termination.

Cash Flow

The total sum of cash and cash-equivalents that flows in and out of a company.

Present Value

The worth at present of a future money amount or cash flow sequences, evaluated using a certain rate of return.

Future Value

The future value of an asset or cash that, on a specific future date, is equal in worth to a given amount today.