Skip to content

Can a 20 percent up or down walk return to start

Question

Each day an asset's price is multiplied by either 1.21.2 or 0.80.8, each with probability 12\tfrac12, independently of other days. What is the probability that after 1010 days the price equals its starting value?

Short answer

0. With kk up-days the price ratio is (65)k(45)10−k=6k 410−k510(\tfrac65)^k(\tfrac45)^{10-k}=\dfrac{6^k\,4^{10-k}}{5^{10}}. The numerator has no factor of 55, so the ratio can never equal 11 for any kk; the event is impossible.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

See the hint and the full worked solution in the question bank (free account).

Open the worked solution

Lessons behind this question

Start with a free lesson: Probability Fundamentals is part of a free topic. Create a free account, no card needed, to read it in full with worked solutions.

Read it free