wk4 dq1

2021/5/25 Solved: Respond to the following comments:a. “The random-walk t... | Chegg.com

https://www.chegg.com/homework-help/respond-following-comments-random-walk-theory-implication-i-chapter-11-problem-11ps-solution-9780073530741-exc 1/3

home / study / business / corporate �nance / corporate �nance solutions manuals / principles of corporate �nance, concise / 2nd edition / chapter 11 / problem 11ps

Principles of Corporate Finance, Concise (2nd Edition)

See this solution in the app

Problem

Respond to the following comments:

a. “The random-walk theory, with its implication that investing in stocks is like playing roulette, is a powerful indictment of our capital markets.”

b. “If everyone believes you can make money by charting stock prices, then price changes won’t be random.”

c. “The random-walk theory implies that events are random, but many events are not random. If it rains today, there’s a fair bet that it will rain again tomorrow.”

Step-by-step solution

Efficient market hypothesis

It states that stock prices reflect the news and information in market efficiently and that is the reason why selling stock in efficient market does not result in positive NPV

Random Walk theory:

It states that stock prices of independent of each other and vary randomly like a walk which is random.

Comment

a.

In a paper written by Maurice Kendall, it was observed that stock prices vary every week in a random manner. This resulted in Random Walk theory, which says that the changes in prices of stocks drifts by different values every week. When stock prices were observed, no regular pattern was found. They were behaving in a random manner with no dependence on previous values.

Comment

b.

Step 1 of 4

Step 2 of 4

Step 3 of 4

My Textbook Solutions

Principles of Corporate... 2nd Edition

Principles of Corporate... 9th Edition

Fundament s of... 7th Edition

View all solutions

Post a question Answers from our experts for your tough homework questions

Enter question

Continue to post 20 questions remaining

Snap a photo from your phone to post a question We'll send you a one-time download link

888-888-8888 Text me

By providing your phone number, you agree to receive a one-time automated text message wit link to get the app. Standard messaging rates m apply.

Bookmark Show all steps:Chapter 11, Problem 11PS ONFind solutions for your homework Search

  Textbook Solutions Expert Q&A Practice Study Pack 

2021/5/25 Solved: Respond to the following comments:a. “The random-walk t... | Chegg.com

https://www.chegg.com/homework-help/respond-following-comments-random-walk-theory-implication-i-chapter-11-problem-11ps-solution-9780073530741-exc 2/3

COMPANY

LEGAL & POLICIES

CHEGG PRODUCTS AND SERVICES

CHEGG NETWORK

CUSTOMER SERVICE

© 2003-2021 Chegg Inc. All rights reserved.

Recommended solutions for you in Chapter 11

See more problems in subjects you study

Was this solution helpful?

If everyone believes that past prices will result in patterns and will reflect in stock market, they will start investing in stock prices driving the market. But any new information will affect this and crash the price if it was wrongly increased. A correction happens.

Comment

c.

According to random walk theory, the events are random. It is true since any news is new information and cannot be predicted beforehand. And the news which can be predicted is already incorporated in the stock price.

Comment

Step 4 of 4

1 0

Chapter 11, Problem 12PS

Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to...

See solution

Chapter 11, Problem 11PS

Respond to the following comments:a. “The random-walk theory, with its implication that investing in stocks is like playing...

See solution

Bookmark Show all steps:Chapter 11, Problem 11PS ON

  Textbook Solutions Expert Q&A Practice Study Pack 

2021/5/25 Solved: Respond to the following comments:a. “The random-walk t... | Chegg.com

https://www.chegg.com/homework-help/respond-following-comments-random-walk-theory-implication-i-chapter-11-problem-11ps-solution-9780073530741-exc 3/3

Bookmark Show all steps:Chapter 11, Problem 11PS ON

  Textbook Solutions Expert Q&A Practice Study Pack 