Question

Stock prices will follow a random walk if
a. markets reflect all available information in a rational way.
b. stocks are overvalued.
c. stocks are undervalued.
d. people behave irrationally when choosing stock.

Answer 1

The correct answer is:

**a. markets reflect all available information in a rational way.**

This is consistent with the Efficient Market Hypothesis (EMH), which suggests that stock prices fully reflect all available information, leading to a random walk in prices. Under this theory, any new information that affects stock prices is quickly and rationally incorporated, meaning past price movements do not predict future price movements.