The Random Walk Theory of Stock Prices Indicates That

question 345

Multiple Choice

The random walk theory of stock prices indicates that

• A) if they are willing to do a little research, even beginning investors will be able to pick the stocks that will increase most in price in the future.
• B) managed mutual funds will persistently earn a higher rate of return than indexed funds.
• C) current stock prices already reflect information about factors influencing future stock prices that can be forecast with any degree of accuracy.
• D) stock market investors can expect to earn a steady real rate of return of about 7 percent annually.

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Definitions:

Residual Value

The projected worth of an asset upon reaching the conclusion of its service period.

Straight-line Method

A depreciation method that allocates an equal amount of depreciation each year over the useful life of an asset.

MACRS

Modified Accelerated Cost Recovery System, a method of depreciation in the U.S. that allows businesses to recover investments in certain property through annual deductions.

Property

Physical or intangible assets owned by an individual or business, including land, buildings, and intellectual property.