The statement that stock prices follow a random walk implies that
I.successive price changes are independent of each other;
II.successive price changes are positively related;
III.successive price changes are negatively related;
IV.the autocorrelation coefficient is either +1.0 or −1.0
A)I only
B)II and III only
C)IV only
D)III only

Question

Quizplus · Accepted Answer

The random walk hypothesis assumes that stock prices are unpredictable and change randomly from one period to another. This implies that each successive price change is independent of previous changes, making answer choice I the correct statement. The random walk hypothesis does not imply any relationship between successive price changes (positive or negative), so answer choices II and III are incorrect. Additionally, the autocorrelation coefficient can be any value, not just +1 or -1, making answer choice IV incorrect.

The Statement That Stock Prices Follow a Random Walk Implies