Explain how Random Walk Theory makes it difficult for investors to make short run decisions.
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Random Walk Theory suggests that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot predict its future movement. In other words, this theory posits that stocks take a Show more…
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II. Proponents of the random walk theory of stock prices hold that predictions of whether a stock will do better or worse than the market in the short run (for example: one month) are no better than could be obtained by flipping a fair coin. Suppose that each of 100 different analysts select 8 stocks that they predict will beat the market next month. A. What is the probability that no analyst gets 8 winners assuming the validity of the random walk theory. B. What is the probability that at least one analyst gets 8 winners assuming the validity of the random walk theory. C. State the assumptions you made in answering part A.
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