Question

What's random walk hypothesis in investment management

Answer 1

Random walk hypothesis is a financial theory which states that stock prices evolve according to a random walk.random walk is a statistical phenomenon where the variable follows no discrete trend or just moves in a random way so in the stock market price is the random variable and thus the stock prices changes randomly and cannot be predicted.this theory assumes that stock prices are independent of eachother and follow same distribution pattern. Information about the past trend or movement of stock prices or market as a whole cannot be used to determine the future stock price. The investor should take additional risk to earn profits in the market.this theory recommends buy and hold strategy for the investors especially in those stocks which represents the entire stock market for instance s&p 500, it says that it is not dependent on technical and fundamental analysis as it is of no use because technical analysts act only after some movement has occurred in stock prices and the fundamental analysis is not useful due to inferior quality of information or misinterpretation of information obtained from past trend.