Stock Market Investment

Paper Summary:

The paper describes and contrasts the efficient market hypothesis and the random walk theory and evaluates which is more likely to be the way the market reacts in the "real" world. The former theory suggests that the market is unpredictable because the stock price already reflects collective information that cannot be overcome by the individual investor. The latter theory states that the market is unpredictable because stock price fluctuations are not bound to any rules. The paper concludes that the efficient market hypothesis holds more truth because a stock price is really determined by collective information. The random walk theory doesn't take into account that the market is not random in the long term.

Outline:
Introduction
Body
Conclusion

From the Paper:

"The price movement in the stock market is well studied by investors in hopes of making profit and getting above average returns. Fundamental and technical analyses have been used in the past (and is still being used right now) to determine which stocks are undervalued/overvalued. However, there are some theories that point to the fact that the stock market is inherently unpredictable, and that no one can continuously outperform the market. These are the "Efficient Market Hypothesis" and the "Random Walk Theory". These two concepts both highlight the market's unpredictability and the futility of analysis being done by investors. The Efficient Market Hypothesis states that the security prices of traded securities already reflect all known data, and that no stock is overvalued/undervalued. It implies that no amount of analysis will result in outperforming of the market. The Random Walk Theory, on the other hand, states that price movements are not subject to patterns or trends. Stock prices are just "random walks", where the price can either go up or down the next day without obeying any rule. It also implies that given a large number of investors, someone is bound to outperform the market - but this can only be attributed to pure luck. The rest of investors trying to predict the market will only underperform."

Sample of Sources Used:

• "Efficient Market" Wikipedia, The Free Encyclopedia. 7 December 2005. [Online] http://en.wikipedia.org/wiki/Efficient_market [Accessed 14 Dec. 2005]
• "Random Walk Theory" StockCharts.com. [Online] http://www.stockcharts.com/education/Overview/randomWalk.html [Accessed 14 Dec. 2005]
• Russel, Philip and Torbey, Violet. "The Efficient Market Hypothesis on Trial: A Survey". [Online] http://www.westga.edu/~bquest/2002/market.htm [Accessed 15 Dec. 2005]
• "The Efficient Market Hypothesis & The Random Walk Theory" Investor Home. 3 March 1999. [Online] http://www.investorhome.com/emh.htm [Accessed 15 Dec. 2005]

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