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Expected wealth when heads doubles and tails halves

Question

You start with 11. A fair coin is tossed repeatedly: on heads your wealth doubles and on tails it halves. What is your expected wealth after nn tosses, and what happens as nn grows large?

Short answer

(5/4)n(5/4)^n, which explodes. Each toss multiplies wealth by 22 or 12\tfrac12 with mean factor 2+0.52=1.25\tfrac{2+0.5}{2}=1.25. But log⁡2\log_2 of wealth is a symmetric random walk, so the median stays near 11: the growing mean comes from rare long runs of heads.

Adapted from Joshi, Denson & Downes, Quant Job Interview Questions and Answers, Q3.5, p.81; question and answer rewritten by SelfMadeQuant.com.

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