If a stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference from the actual return considered to be:
A)a predictable amount based on the past prices.
B)due to new information related to the stock.
C)related to the security's risk.
D)related to the risk-free rate.
E)an overall market abnormality.

Question

Quizplus · Accepted Answer

In a random walk model, the stock price is expected to incorporate all available information, including new information related to the stock. Any difference between the actual return and the expected return is attributed to this new information. Therefore, the correct answer is B, which represents the new information related to the stock. The other choices are not relevant in this context. A predictable amount based on past prices is not applicable to a random walk because it assumes that past price trends can be used to forecast future prices, which is not true in a random walk. The security's risk and the risk-free rate are not relevant in this question as they do not explain the difference between the expected return and the actual return. An overall market abnormality is also not applicable because a random walk model assumes that the stock price only reflects company-specific information and does not depend on overall market trends.

If a Stock Price Follows a Random Walk,the Price Today