Question

Complete the following sentence. If prices capture all relevant information, then the prices will follow a ____________.
Select one:
Random walk
Predictable pattern

Answer 1

Summary of the question :

If price captures all relevant information, then the prices will follow a _________

Answer :

Predictable pattern

Reason : Based on the Efficient Market Hypothesis, which states that all relevant information is reflected in the share prices, then the price would be predicatble. However, this is not only the current information but also expectations about future incomes. Since future information is presently not available, the share price tends to take a random walk....i.e move in any direction.

So if prices were to capture all relevant information, it would follow a predictable pattern. But actually prices do not capture all relevant informaiton because all information is not available to all investors. hence, prices dont capture all information and that is why they may move in any direction