When the 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 to the actual return due to:

Question

Quizplus · Accepted Answer

When the stock price follows a random walk, the only factor that can cause the actual return to deviate from the expected return is new information that was not previously known or incorporated into the stock price. This new information is unrelated to past prices, making choice B correct. Predictable amounts based on past prices, the security's risk, and the risk-free rate do not explain the remaining difference in a random walk model.

When the Stock Price Follows a Random Walk the Price