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RANDOM WALK THEORY - Coggle Diagram
RANDOM WALK THEORY
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Basic Assumption
The random walk theory assumes that the price of each security in the stock market follow a random walk.
The random walk theory also assumes that movement in the price of one security is independent of the movement in the price of another security.
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The theory 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 be used to predict its future movement.
In short, random walk says that stocks take a random and unpredictable path.
Under the random walk theory, there is an equal chance that a stock's price will either rise or fall from current levels.
The random walk theory is the belief that price behavior cannot be predicted because it does not act on any predictive fundamental or technical indicators.