Answered: (i) random walk hypothesis, (ii)…

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter31: Capital Markets

Section: Chapter Questions

Problem 8E

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Question

Within the context of forecasting share price movement, three are the most popular theories used in the determination of changes in stock prices: (i) random walk hypothesis, (ii) efficient market hypothesis and (iii) behavioral finance. Discuss each of these approaches.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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