Security markets have been described as random walks and efficient markets. What does each of these terms mean and how do they relate to the stock market?
What makes a market efficient and what are the consequences of efficiency for fundamental and technical analysis?
What will be an ideal response?
Answer: Random walk refers to the belief that price changes in the market do not follow any pattern but occur on a purely random basis.
An efficient market means that information is quickly and accurately reflected in security prices. The quick and widespread availability of information, and the fact that people conduct security analysis, makes the market efficient.
In an efficient market, neither fundamental nor technical analysis is of real value. If markets are totally efficient, then it is impossible to consistently outperform the market.
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