When the Stock Price Follows a Random Walk, the Price

question 23

Multiple Choice

When the stock price follows a random walk, the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference to the actual return due to:

• A)a predictable amount based on the past prices.
• B)a component based on new information unrelated to past prices.
• C)the security's risk.
• D)the risk free rate.
• E)None of the above.

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Definitions:

Stock Price

The cost at which a share of a company is bought or sold in the stock market.

Interest Rate

is the cost of borrowing money, expressed as a percentage of the total amount loaned, paid to lenders by borrowers for the use of the borrowed funds.

Expected Future Profits

The anticipated earnings or returns a company or investment is predicted to generate in the future, based on current trends or calculations.

Random Walk Theory

A financial theory suggesting that stock market prices evolve according to an unpredictable and random path.