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:

Insider Trading

The unethical and often illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

Tender Offer

A public proposal by an individual or entity to buy shares of a corporation from its shareholders at a specified price for a certain period of time.

Market Price of the Shares

The current price at which a share of stock is bought or sold on the market.

Section 5

Often associated with specific legal documents or statutes, such as the Federal Trade Commission Act, where it prohibits unfair or deceptive business practices.