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 cannot be explained by expected return can only be explained by the unexplained portion of price change in a prior period.
E) None of these.

Question

Quizplus · Accepted Answer

In an efficient market, stock prices incorporate all available information and moves randomly without any predictable patterns. This means that the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period, which is known as a "random walk" in stock prices. Therefore, choice C is the correct answer. Option A is incorrect because while there may not be an easily identifiable driving force behind price changes, there are still many factors that affect stock prices. Option B is wrong because technical analysts cannot consistently predict future price movements in an efficient market. Similarly, option D is incorrect because the unexplained portion of price change in one period cannot be explained by a prior period's unexplained portion. Finally, option E is incorrect because choice C is the correct answer.

Under the Concept of an Efficient Market,a Random Walk in Stock