Question

Discuss whether the following statements are true or false with supporting explanations, if stock prices follow a random walk pattern:

1. Successive stock prices are not related.                                                             

2. Successive stock price changes are not related.                                                 

3. Stock prices fluctuate above and below a normal long – run price.                   

4.             The history of stock prices cannot be used to predict future returns for investors.     

Answer 1

a) FALSE

Successive stocks prices are related in the sense that price of the stocks tend to follow trend of the swing of the price therefore previous price forms the basis for the next price action . so that is why successive stock are related to each other

b)TRUE

successive stock price change refers to the percentage in stock price with relation to previous close . these change under random walk theory does not hold any infrence therefore are regarded futile in nature.

c)FALSE

In short, random walk theory proclaims that stocks take a random and unpredictable path that makes all methods of predicting stock prices futile in the long run.

d)TRUE

Random walk theory suggests that changes in stock prices have the same distribution and are independent of each other. Therefore, it assumes the past movement or trend of a stock price or market cannot be used to predict its future movement.