If stock prices did not follow a random walk, there would be unexploit

QUESTION

If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market. Is this statement true, false, or uncertain? Explain your answer.
Answer: Random walk hypothesis state that the movement of a stock price is random. There is no co-relation between the price changes that are successive. The movement in the stock price is independent of what the price in the past was. The movement of individual stocks as well as the entire stock market is not predictable. Thus, according to this theory, the path that the stock price follows is random and is not influenced by the past price movements, especially in the short term. So it is impossible to beat the market without taking on additional risks. If stock prices did not follow a random walk, it would be possible to time the market by looking at the past price and volume data and there would exist opportunities to earn abnormal profits. Technical analysts believe investor behaviour is reflected in trends and patterns that tend to repeat and can be identified and used for forecasting prices. Technical analysis is not concerned with identifying the reasons why the investors traded but only the trades that occurred. A key advantage of using actual price and volume data is that they are observable. In fundamental analysis, which attempts to determine the intrinsic value of an asset, much of the data is subject to assumptions or restatements. Technical analysis¦

n also be useful when financial statement fraud occurs. Price and volume may reflect the true value of the company even before the fraud is widely known and before the financial statements are restated. The usefulness of technical analysis is limited in markets where price and volume data might not truly reflect supply and demand. This may be the case in illiquid markets and in markets that are subject to outside manipulation (for example, currency market intervention by central banks. For stocks of bankrupt companies, short covering can create positive patterns even when it is known that the stock price will go to zero. Thus we can conclude that it is true if stock prices did not follow a random walk, there would be unexploited profit opportunities in the market which could be exploited by carefully timing the market or doind technical analysis.

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION