A:

The random walk theory is the occurrence of an event determined by a series of random movements - in other words, events that cannot be predicted. For example, one might consider a drunken person's path of walking to be a random walk because the person is impaired and his walk would not follow any predictable path. (For more, read Financial Concepts: Random Walk Theory.)

Applying the random walk theory to finance and stocks suggests that stock prices change randomly, making it impossible to predict stock prices. The random walk theory corresponds to the belief that markets are efficient, and that it is not possible to beat or predict the market because stock prices reflect all available information and the occurrence of new information is seemingly random as well.

The random walk theory is in direct opposition to technical analysis, which contends that a stock's future price can be forecasted based on historical information through observing chart patterns and technical indicators.

Academics cannot conclusively prove or agree on whether the stock market truly operates via a random walk or based on predictable trends because there are published studies that support both sides of the issue.

RELATED FAQS
  1. What are the best selection methods for creating a simple random sample?

    Discover some of the methods that researchers and pollsters utilize to select a simple random sample from a population group ... Read Answer >>
  2. What are the advantages of using a simple random sample to study a larger population?

    Learn how simple random sampling works and what advantages it offers over other sampling methods when selecting a research ... Read Answer >>
  3. How do researchers ensure that a simple random sample is an accurate representation ...

    Learn which methods researchers employ to ensure that a simple random sample best approximates the larger population being ... Read Answer >>
  4. What are the disadvantages of using a simple random sample to approximate a larger ...

    Learn what a simple random sample is, how researchers use it as a statistical tool and the disadvantages it carries when ... Read Answer >>
  5. How does stratified random sampling influence government policy decisions?

    Understand how governments use stratified random sampling to collect more precise data to help in making better informed ... Read Answer >>
  6. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
Related Articles
  1. Investing

    Financial Markets: Random, Cyclical Or Both?

    Are the markets random or cyclical? It depends on who you ask. Here, we go over both sides of the argument.
  2. Investing

    Intro to Stationary and Non-Stationary Processes

    Refining data points is the key to applying financial series time data to stock analysis.
  3. Investing

    Viewing The Market As Organized Chaos

    Find out how a cat and a ladybug prove markets are both random and efficient.
  4. Trading

    Random Reinforcement: Why Most Traders Fail

    This phenomenon can cause a trader to abandon a proven strategy or risk everything on chance. Find out how to avoid it.
  5. Investing

    Understanding the Simple Random Sample

    A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen.
  6. Retirement

    Retirees: Find the Most Walkable Cities for Relocation

    When you're choosing a place to relocate when you retire, don't forget to check out its Walk Score.
  7. Investing

    Introduction To Stationary And Non-Stationary Processes

    What to know about stationary and non-stationary processes before you try to model or forecast.
  8. Trading

    4 Ways To Predict Market Performance

    There is academic evidence supporting different market views. Learn how and why the market can be predicted.
  9. Investing

    Monte Carlo Simulation With GBM

    Learn to predict future events through a series of random trials.
  10. Investing

    What Are The Odds Of Scoring A Winning Trade?

    Just because you're on a winning streak doesn't mean you're a skilled trader. Find out why.
RELATED TERMS
  1. Random Factor Analysis

    A statistical analysis performed to determine the origin of random ...
  2. Random Walk Theory

    The theory that stock price changes have the same distribution ...
  3. Runs Test

    A statistical procedure that examines whether a string of data ...
  4. Simple Random Sample

    A subset of a statistical population in which each member of ...
  5. Weak Form Efficiency

    One of the different degrees of efficient market hypothesis (EMH) ...
  6. Random Variable

    A variable whose value is unknown or a function that assigns ...
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center