If markets are efficient a random walk explain stock returns. Why? How does the random walk...

If markets are efficient a random walk explain stock returns. Why?

How does the random walk in stock prices make finance into a science (according to my lecture)?

Expert Solution

ANSWER-

RANDOM WALK THEORY- Random Walk Theory suggests that the movement of any stock price can not be predicted either with the help of technical or fundamental analysis as the stock prices move independently and randomly. The stock prices do not depend on any past trend (technical analysis) or calculations based on company's performance (through fundamental analysis)

MARKET EFFICIENCY- Market efficiency states that no one can predict the movement of stock prices to out perform the market because the stock reveals all the information about the same at any given point of time which can not be predicted nor insider trading would provide any information to anybody. Every information is out to the public at the same time or present time by the concerned stock which can not even predicted before by anyone.

RANDOM WALK IN STOCK PRICES MAKES FINANCE TO A SCIENCE- As the future stock prices are completely independent of its past trend or history, it's every next step is found to be a probability for a short run (because the same can not be predicted) just like we find probability of something that may happen in future. Therefore, it acts as a science

jeff jeffy answered 5 days ago

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