Random Walk
A. Random walk is a movement in which future steps or directions cannot be predicted. Applying random walk theory to stock market simply means short run gains/loses in stock prices cannot be predicted. Hence, advisory services, earnings predictions, and forecast analysis are obsolete, not to mention, costly. Eliminate the middlemen!B. Malkiel promotes "The Get Rich Slowly but Surely" method that advises investors to stay even, meaning, investments must secure a rate of return equal to inflation. Ideally, most investors would want holdings that have rate of return higher than inflation. Rate of Return > Inflation. C. Firm-Foundation Theory states that assets rely on their present conditions and future prospects in order to establish an intrinsic value. The prospective dividends are then factored into the stock's market price; hence, it's intrinsic value rises/falls. D. Castle-in-the-Air Theory is one that focuses on the dreams and wants of masses. For example, the Tulip Bulb Craze was a classic example of a self-fulfilling prophecy. The prices of the bulbs skyrocketed because the buyers made them by way of DEMAND. There were not enough bulbs to go around an
E. Risk determines the level of return. G. Modern Portfolio Theory advocates holdings in both foreign and domestic stocks along with bonds. F. Returns are sensitive to market swings, exchange rates, market interest rates, and other economic factors. D. The academic community along with Wall Street's chartists believes that professionally managed portfolios will always outperform randomly selected portfolios of stocks with equal risk characteristics. F. "Technical methods cannot be used to make useful investment strategies. This is the fundamental conclusion of the random-walk theory." C. Just like anything else, the stock market has trends and these trends often influence the prices of securities. I. High dividends usually mean high returns.
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Approximate Word count = 1077
Approximate Pages = 4 (250 words per page double spaced)
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