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Question 8-5CP

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Essentials Of Investments
Found in: Page 261
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

A “random walk” occurs when:

a. Stock price changes are random but predictable.

b. Stock prices respond slowly to both new and old information.

c. Future price changes are uncorrelated with past price changes.

d. Past information is useful in predicting future prices.

The correct answer is ‘c’

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Step by Step Solution

Definition

As per the random walk theory, the future of a stock or market cannot be predicted based on its past movement.

Explanation

As per the definition above, a random walk implies unpredictable changes in stock prices. It will have no relation with past price change or any other data.

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