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:

IRR

Stands for Internal Rate of Return, a financial metric used to estimate the profitability of potential investments.

Variance

A statistical measure that indicates the spread of data points in a dataset around the mean, reflecting the data's volatility.

Risk Averse

The tendency to prefer certainty over risk, where an individual opts for the investment with the least potential for financial loss.

NPV

A financial metric that calculates the total value of a project or investment by discounting future cash flows back to their present value and subtracting initial investment cost.