Under the concept of an efficient market, a random walk in stock prices means that:
A)there is no driving force behind price changes.
B)technical analysts can predict future price movements to earn excess returns.
C)the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.
D)the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period.
E)None of the above.

Question

Quizplus · Accepted Answer

A random walk in stock prices implies that the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period, indicating that there is no predictable pattern or driving force behind price changes. This contradicts option B, which suggests that technical analysts can predict future price movements, and option D, which suggests that unexplained price changes can only be explained by prior unexplained changes. Option A is incorrect because there may still be driving forces behind price changes, but they are unpredictable and random. Option E is incorrect because option C is a valid characteristic of a random walk in stock prices.

Under the Concept of an Efficient Market, a Random Walk