Expected wealth when heads doubles and tails halves
Question
You start with . A fair coin is tossed repeatedly: on heads your wealth doubles and on tails it halves. What is your expected wealth after tosses, and what happens as grows large?
Short answer
, which explodes. Each toss multiplies wealth by or with mean factor . But of wealth is a symmetric random walk, so the median stays near : 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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Open the worked solutionLessons behind this question
- Expectation, Mean, and Variance
- Conditional Expectation and Variance Revisited
- Sample Spaces, Events, and the Probability Axioms
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