Share prices will follow a random walk if
A) shares are overvalued.
B) people behave irrationally when choosing shares.
C) markets reflect all available information in a rational way.
D) shares are undervalued.

Question

Quizplus · Accepted Answer

The concept of random walk suggests that market prices follow a pattern of unpredictable fluctuations. This is because markets reflect all available information in a rational way, and thus, any new information that becomes available is immediately incorporated into the share price, causing it to move randomly. Overvalued or undervalued shares may have a significant impact on share price movement in the short term, but their effect will eventually be reflected in the market and absorbed into the random walk. Behaviors that are considered irrational may have a short-term impact on share prices, but in the long run, markets tend to self-correct, and share prices follow a random walk.

Share Prices Will Follow a Random Walk If